FHA to Change Guidelines due to Buy and Bail

A new mortgagee letter from the FHA was posted yesterday. In it the guidelines were changed for those homeowners who currently own a home and are looking to rent the property and buy a new primary residence. The goal of these new changes is to "respond to an unscrupulous practice arising in the housing market that poses a risk to FHA..." This unscrupulous practice is known as buy and bail, where current homeowners buy a new home under the guise that they will rent their former residence and in turn they let the house go into foreclosure.

Here are the highlights:

1) Cannot use the rental income from the previous home unless there is 25% equity in that property.

2) Borrower must qualify for the new mortgage with the new mortgage payment and the previous home's mortgage payment.

3) Surrounding properties with FHA mortgages would be negatively affected by the bail out on the old residences by these customers seeking new FHA mortgages.

Exceptions:

1) IF THE BORROWER HAS SUFFICIENT EQUITY (25% or more) THEN THEY WILL UNDERWRITE USING RENTAL INCOME PERCENTAGES.

2) IF THE BORROWER IS REQUIRED TO MOVE THROUGH JOB TRANSFER WITH CURRENT EMPLOYER THEN THEY WILL UNDERWRITE USING RENTAL INCOME. (NEED VERIFICATION OF SECURITY DEPOSIT AND ONE MONTH'S RENT TO THE BORROWER FROM RENTER)

Hope this helps. Good luck. For the actual mortgagee letter check the HUD website and look up letter 2008-25.