FHA Buy And Bail Guideline Update: January 24, 2011.
How lenders interpret FHA guidelines.
On September 19, 2008, FHA issued MORTGAGEE LETTER 2008-25 which can be viewed here .
It is also listed on this site here.
The purpose of this letter was to address what is commonly referred to as a Buy and Bail transaction. This is where a consumer decides to rent their current primary home and buy a new home. Some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities like buying a home of similar size for less than what they owe on their current mortgage.
As a result of some home-buyers providing misleading or outright fraudulent information (like a fake lease agreement) regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the home-buyer can make payments on the full debt service of both mortgages.
Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter, *see below for these exceptions*.
The exclusion of rental income from property being vacated is being instituted on a temporary basis. This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated (rented out). In either case, this guidance is directed to preventing the practice known as “Buy and Bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.
* These are the exceptions directly from FHA*.
Exceptions:
Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see http://www.hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be considered in the underwriting analysis under the following circumstances:
- Relocations: The home-buyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance. A properly executed lease agreement (i.e., a lease signed by the home-buyer and the lessee) of at least one year’s duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month’s rent was paid to the homeowner.
- Sufficient Equity in Vacated Property: The home-buyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property. The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.
This is where we get in to the problem of lender interpretation of FHA’s Buy and Bail guidelines.
Some lenders read the letter’s exceptions and see it as FHA telling them that you have to meet BOTH requirements and others will look at it and say you have to meet one or the other.
Here is a great example of this very issue: Trulia
In the linked thread above you will see at least two lenders going back and forth citing opinions and actual lender guidelines based on the lender’s interpretation of FHA’s Buy and Bail guidelines. I have at least two different lenders that view this letter as one or the other.
Here is the point: Make sure that the lender you’re dealing with understands your situation and if they say no, DON”T GIVE UP. Try to find a loan officer that knows their underwriters and the way the underwriters interpret the FHA Buy and Bail guidelines.
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