Lenders Catch On To "Buy & Bail"

A couple years ago, you bought a no-frills home with a yard so small a chihuahua would get claustrophobia if you let the little critter stay out there for too long. You thought $500,000 was such a steal, considering that there were ten other offers on it. Today, it's only worth $350,000.

Over the weekend, you find out that a much larger home down the street is for sale. It's got a yard that could hold a small country, and , and it's got all the upgrades that you could ever wish for. The price tag? $300,000.

"Hmmm," you say, as your mind races a mile a minute. If you're thinking that you could use your good credit to purchase a second home by telling the lender that you're going to rent out your first property and then let it fall into foreclosure once you've purchased the second one, think again. Lenders are on to what's known as the "buy-and-bail" and they've put new guidelines into place to safeguard against "buy-and-bail" situations.

Here are a couple of them:

• The borrower's current property has to have at least 30% equity in it.


• If the borrower has put their current property up for sale, and it does not close prior to the second property closing, the lender will require that the housing payment be included in the qualifying ratios unless one of the following exists: the borrower has a minimum two year history of managing rental properties verified through the most recent two years of tax returns; or provides a copy of the fully executed sales contract and the sale of the current home closes simultaneously with the subject transaction; or if not closing simultaneously, provides a copy of the fully executed sales contract, lenders commitment letter to the buyer of the current home, and verification of post close reserves sufficient to cover 6 months housing payments

Lastly, if you're thinking of getting an FHA loan and having just your spouse be on the new loan so that your debt-to-income ratios meet the lender's guidelines, think again. FHA guidelines require that the non-borrower spouse's debts be included as part of the total debt. The logic behind this is that the additional debt will impact the couple's ability to repay their mortgage.

There are several major changes to Fannie Mae guidelines that have to do with conversion of principal residence to rental property, as well bankruptcy and foreclosure seasoning requirements. If you'd like to get more detailed information about these new Fannie Mae guidelines, holla' at me!