Colorado real estate investors are discovering new ways to access their property equity through DSCR (Debt Service Coverage Ratio) loans. These non-QM loan products allow investors to qualify based on rental income alone, without traditional personal income verification. In this comprehensive guide, we’ll walk through two real Colorado transactions that showcase how DSCR loans work in practice.
What Are DSCR Loans?
DSCR loans qualify borrowers based on a property’s ability to generate enough rental income to cover its mortgage payment. The formula is simple:
DSCR = Monthly Rental Income ÷ Monthly Mortgage Payment
No Personal Income Documents: No tax returns, W-2s, or employment verification
Investment Properties Only: Cannot be used for owner-occupied homes
Most lenders require a DSCR of 0.75 or higher. This means the property breaks even or generates positive cash flow. Colorado investors have two DSCR options:
DSCR Fixed Rate Second Loans
- DSCR Second Mortgage: Fixed-rate loan behind your existing first mortgage
- Loan Amounts: $150,000 to $750,000
DSCR HELOC
- A non-QM HELOC line of credit that is allowed in first lien position only
- Line of Credit Amounts: $200,000 to $3,000,000
Case Study #1: Denver DSCR HELOC Success Story
Transaction Details
- Location: Denver, Colorado
- Property Type: Single-family rental home
- Property Value: $850,000
- HELOC Amount: $500,000
- Loan-to-Value: 60%
- Existing Mortgage: Free and clear
- Monthly Rent: $3,200
- DSCR Ratio: 1.45
- Use of Funds: Purchase additional property
- Closing Time: 28 days
Why This DSCR HELOC Worked
This Denver transaction was ideal for a DSCR HELOC because the property was free and clear with no existing mortgage. Since a DSCR line of credit can only be in first lien position, having no existing liens to subordinate made this straightforward.
The Numbers: With monthly rent of $3,200 and an estimated monthly payment of $2,200 (including taxes and insurance), the property achieved a strong DSCR of 1.45. The conservative 60% LTV provided excellent risk mitigation for the lender.
Investor’s Strategy: The borrower plans to use the $500,000 HELOC to purchase and renovate a second rental property in the Denver metro area, leveraging their existing equity to grow their portfolio without selling their cash-flowing asset.
Case Study #2: Boulder DSCR Second Mortgage
Transaction Details
- Location: Boulder, Colorado
- Property Type: Single-family rental home
- Property Value: $750,000
- Second Mortgage: $150,000
- Combined LTV: 80%
- First Mortgage: $450,000 at 4.75%
- Second Mortgage Rate: 9.25%
- Monthly Rent: $3,800
- DSCR Ratio: 1.22
- Use of Funds: Property improvements
Why a DSCR Second Mortgage Made Sense
This Boulder investor had an existing first mortgage at an attractive 4.75% rate. Rather than refinancing the entire loan and losing that low rate, a DSCR second mortgage allowed them to keep their existing financing in place while accessing additional equity.
Rate Considerations: DSCR second mortgages typically carry rates in the high 8% to 10%+ range, depending on credit score and loan specifics. At 9.25%, this borrower received competitive pricing for a non-QM second mortgage.
Cash Flow Analysis: With $3,800 monthly rent and total mortgage payments of $3,115 (including the new second mortgage), the property maintained a healthy 1.22 DSCR, well above the 1.0 minimum requirement.
Colorado Real Estate Investing Opportunities
Both case studies highlight the opportunities available to Colorado real estate investors across different markets. Denver’s strong rental demand supported the larger HELOC, while Boulder’s premium property values made a smaller second mortgage effective for property improvements.
