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 doesn't 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
• The borrower must have a fully-executed lease with at least a one-year term from the closing date of their new mortgage; and
• 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 the following:
• 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 information.
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 whats good, what you have and what you want more of. Deal with the rest as best you can, but dont 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 Southfield, Mich.-based 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].