FHA responds to "buy and bail" transactionsJeff Mifsud FHA loans, buy and bail, Mortgagee Letter 2008-25
Well, we knew there had to be some type of response from the
Federal Housing Administration (FHA) regarding the "buy and bail"
phenomenon that is occurring throughout the country. The update
from Mortgagee Letter 2008-25 establishes guidelines for situations
where people buy one home with the intention of defaulting on their
current residence, a practice known as known as "buy and bail."
While these guideline changes are temporary, and were effective as
of Sept. 19, 2008, they clarify when an underwriter may include the
rental income from the current residence.
This is not the first time in history this has occurred, but I
hope it will be the last (hey, I can hope!). Once borrowers started
to "buy and bail," loan officers from around the country started
contacting me and asking: "Does FHA care if a borrower buys a new
home and lets the current residence go?" I answered that as long as
they were able to qualify with both payments, or had a valid lease,
the guidelines didn't prohibit this. However, the more regularly I
got this question, and repeated the answer, it became clear that
loan officers were working with borrowers who were planning a "buy
and bail." I felt that FHA needed to step in and modify their
guidelines to account for this new trend. Although FHA guidelines
are only concerned that their lien is valid and have not been
concerned with other subordinate liens (e.g., no max combined
loan-to-value ration on refinances), I believe it was a good move
on FHA's part to show concern for the defaults of other banks'
loans. Establishing some parameters for this circumstance can
further assist in stabilizing our housing market.
When a borrower will be renting out their current residence in
order to qualify for their new home (if they qualify with both
payments, then this doesnt apply), one of the following criteria
must be met in order to be able to include the rental income from
their current residence:
1. When the borrower is relocating to a new job location:
• The new home must be outside reasonable commuting distance
from the current residence (underwriter's discretion);
• The borrower must have a fully-executed lease with at least
a one-year term from the closing date of their new mortgage;
• The borrower must document receipt of the security deposit
and/or first month's rent.
2. When the current residence has a loan-to-value ration of 75
percent or less, the value of current residence can be proved with
• An appraisal that is no more than six months old;
• The original HUD-1 and current mortgage statement.
Use this update and take the opportunity to reach out to your
local real estate offices. Make yourself a resource of FHA
On a separate note, and in closing, I would like to strongly
urge that you not let the network media reports allow you to start
thinking negatively! If you need to, turn off the news! Negative
thinking will only debilitate you and create a stumbling block for
further growth, both professionally and personally. I encourage you
to also make a point of removing yourself and staying away from
people who focus on how "bad" things are. Instead, surround
yourself with people who are positive, motivated, focused and have
similar goals. Just as members of a sports team support each other
through all the ups and downs of practice and competition, you need
to create a supportive, helpful team around you (and be a part of
their team as well!). There is a saying (and it is also the title
of a book) that says, "Tough times don't last, but tough people
do." Do you have a roof over your head, food on the table and
clothes on your back? If you do, you are blessed. If you are
additionally fortunate to have good friends and family as well, you
are truly rich. Focusing on lack, or fear, and/or on "what if"
scenarios robs you of the precious, present moment where action
takes place and freezes you into inaction. There's nothing to be
gained in that. Keep your focus on what's good, what you have and
what you want more of. Deal with the rest as best you can, but
don't keep your focus there; do what needs to be done and move on,
keeping your eye on the big picture and creating goals to achieve
and steps to achieve them.
Jeff Mifsud founded Mortgage Seminars LLC in 2004, has been
an FHA originator for 12 years, is a contributor to LoanToolbox.com
and is a former FHA underwriter. Jeff may be reached at (877)
342-9100 or e-mail [email protected]