BUY AND BAIL – What will those innocent homeowners think of next?

Filed under: Buy and Bail — admin @ 7:15 pm

Coining phrases is always an interesting part of a catastrophic economic event.   While brokers have come under fire as the lynchpin of deceit and corruption in the meltdown, I believe it is fitting that we now see borrowers – the doe-eyed innocents – jobbing the system and themselves in the process.  BUY AND BAIL… sounds like a bail bonding convenience store right?  Nope, it is the practice of “swapping” your home for a new one by lying about your current house becoming an investment property.

Let’s say that you bought your home in 2003 for $250K and that home is worth $200K now with a principal balance on the mortgage of $240K.  The house two streets over has more square footage, a pool and a 2 car garage… much nicer than your carport and kiddy pool… going at $210K today with seller concessions.  Creative homebuyers have been maintaining the payments on their own home… then attempting to purchase the upgrade using rental income they anticipate on their current home.  Soon after they purchase the nicer home at the lower price, they stop making payments on their original home.  Buy and bail… three years of bad credit seem to be worth saving $30K and getting a nicer home as the result.
Today FHA implemented a temporary policy for underwriting rental income on existing homes:

Mortgagee Letter 2008-25:  Prohibits the use of rental income to qualify when the borrowers are converting their existing homes to rentals.

Exceptions:

• Sufficient Equity in Vacated Property: minimum of 25% equity as evidenced by a residential appraisal which is no older than 6 months old or by comparing the current balance to the original sales price.
• Rental income must be reduced by the appropriate vacancy factor as determined by the appropriate FHA Home Ownership Center
• Relocations: The borrower is relocating to a new employer or is being transferred to an area that is not within reasonable commuting distance. In order to use the income, a fully executed lease for a duration of at least one year must be provided.  The DE Underwriter must obtain evidence of receipt of deposit / one month’s pre-paid rent.
• This policy only applies to properties that are being vacated for a new residence and does not apply to preexisting rental properties.

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