FHA Tries To Limit “Buy And Bail” Purchases
Posted by Kevin Kueneke | Visited 362 times, 2 so far today | Currently 1 Comment »
I recently wrote a post about FNMA’s underwriting guideline change regarding retaining a principal residence as a rental when buying a new home. The gist of the new guideline is that the retained property needs to have a minimum of 30% equity in order for rental income to be used to help qualify for the new home. Otherwise, the buyers must have an increased amount of reserves in the bank and also sufficient income to carry both mortgages.
Lenders used to allow buyers to merely provide a rental agreement and then use a portion of that rent to offset the house payment. Unfortunately, some buyers would provide a fake rental agreement thinking that they would be able to easily rent out the home.
However, after a few months sitting vacant, and after a few more mortgage payments are made, the nov
elty of having a rental property wears off. The decision to walk away for many folks became very easy to make.
This decision is even easier to make if the retained property is upside down, like many in today’s market. Unfortunately, many people over the last twelve months have purchased more affordable homes with the intention of letting the previous home go, creating what lenders now call “Buy and Bails”.
FHA has temporarily decided to tighten their guidelines to help avoid this practice. Similar to FNMA, if the retained property has sufficient equity in the home (25%), then rental income can be used. Otherwise, borrowers income must be able to support both properties. **Relocation buyers are excluded from this rule as long as an executed lease agreement (with a minimum one year term) is provided as well as proof of receipt of rental deposit**
Even if the vacated property does not have an FHA-insured loan, FHA feels that if the property ended up in foreclosure it might have an impact on the value of nearby homes with FHA-guaranteed mortgages.
I understand FHA’s reasoning behind the guideline change and it was really only a matter of time before FHA followed FNMA. In the grand scheme of things, this change is another step towards reducing future foreclosures, but it does further emphasize that FHA is geared toward the first-time homebuyer.
Any questions? Please feel free to call me at (760)500-1919 or email me: Kevin@MyCWMtg.com
Excellent post on a very current issue. These tougher guidelines of both Fannie and FHA should mitigate the moral hazard of “foreclosures of convenience” and slow the erosion of value within the neighborhood.