FHA Responds To Buy & Bail Transactions

To address increasing occurrences of the practice known as "buy and bail," FHA has issued Mortgagee Letter 08-25 - Converting Existing Homes to Rentals - Underwriting Instructions. FHA is instituting the following requirements for borrowers who purchase a new primary residence without selling their existing primary residence. The term "buy and bail" refers to a developing trend where borrowers purchase a new primary and once the new mortgage is closed, the borrower stops making mortgage payments on the original primary residence and allows the lender to foreclose.

The following changes are effective for loans with case numbers assigned on or after September 19, 2008 and are temporary measures being implemented until FHA determines what, if any, permanent action is required:

**All borrowers must fully qualify with both mortgage payments, and no rental income may be used for the property being vacated.

The only exception is when a homebuyer is relocating with a new employer or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance (UW's discretion), rental income from the property being vacated may be used. The borrower must have a fully executed lease with at least a 1-year term from the closing date of their new mortgage. The borrower must also document receipt of the security deposit and/or first month's rent. The borrower's current residence must have an LTV of 75% or less.

The value of current residence can be proved with the following:
• Appraisal no more than 6 months old, or
• Original HUD-1 and current mortgage statement.

 POST COURTESY OF: