“Buy and Bail,” what’s that you may ask? Inman News posted an article this week discussing a new regulation that will help prevent homeowners from purposely going into foreclosure.
In the recent past it was common for homeowners that were having trouble making their payments to simply purchase a new, more affordable home, with the intention of not continuing to make payments on their previous mortgage and letting the lender foreclose on them. This is called the “buy and bail.”
This was easily possible before the new regulation was put into effect on September 19th, 2008. Homeowners could qualify for a new mortgage simply by stating that they were renting out their current home and FHA guidelines would allow them to count the proposed rental income as a positive on their finacial statement instead of a negative. The new regulation eliminates this option and requires that the home buyer must demonstrate they have sufficient income to support both mortgages.
FHA will allow the rental income to be counted if the borrowers have 25% equity at stake or can prove they are relocating for employment and they have a 12 month lease in place on the home being vacated.
Hopefully, with the new regulation in place, fewer borrowers will be able to take advantage of this “loophole,” that got themselves out of a mess and put the burden on the lenders.
