High mortgage rates come back to bite real estate investors who bet on rising rents

"Applying for a home loan is a pain. You have to produce a heap of documents - bank statements, tax returns, employment records, tallies of investment accounts - to prove the stability of your financial footing, then wait for a mortgage underwriter to comb through all of it before giving you the thumbs up. I spoke with one exasperated homebuyer who described the process as a "borderline invasion of privacy.""

"While the average American submits to a financial colonoscopy en route to their dream home, wannabe real estate moguls have found a way to sidestep the hassle. With the help of a once-obscure type of loan, they've built mini-empires ranging from a few homes to a few hundred - without the usual scrutiny from lenders. These landlords include small-time investors eager to expand their portfolios, TikTok tycoons seeking new streams of real estate revenue, and seasoned property managers looking to make smart bets."

"The loans enable income-seeking owners to quickly purchase rental properties while dodging annoying questions about their job history or outstanding debts. DSCRs may sound complicated, but obtaining one is relatively straightforward: A landlord just has to show their lender that the desired property will generate enough rent to cover the monthly payments and other basic expenses, such as taxes and insurance. The lender focuses on the property's cash flow, not the borrower's personal creditworthiness."

Applying for a home loan requires extensive financial documentation and invasive scrutiny. Some investors use debt-service coverage ratio (DSCR) loans to bypass personal income and credit checks by proving a property's rent will cover payments and expenses. Small-time investors, TikTok creators, and experienced property managers have used billions in DSCR loans to rapidly acquire rental homes. Lenders evaluate property cash flow rather than borrower creditworthiness. DSCR underwriting focuses on projected rent, taxes, and insurance. Serious delinquencies on DSCR loans have nearly quadrupled in three years, though troubled loans remain a small portion of outstanding DSCR debt, signaling strain among leveraged landlords.

Read at Business Insider