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FHA Removes Rental Income Because Of "Buy and Bail" Scams

By
Mortgage and Lending with Independent

 

Effective for all FHA case numbers assigned on and after September 19th 2008 to further notice.

A Borrower cannot use rental income to offset the payment on their departure residence without very specific and narrow exceptions.

The old guidelines when someone wanted to rent their current residence out to buy a new home, FHA guidelines permitted the Rental Income being used to offset the mortgage payment used in Debt-to-Income ratios.

FHA has released the mortgagee letter nationwide found here HUD LETTER

This is due from the simple fact that many homeowners have been found guilty of the "Buy and Bail" scam where the borrowers pretend to rent out their old house, buy a new house and foreclose on their old house regardless if it was actually being rented out or not.

FHA is now instituting a Temporary guideline until further investigations determine the correct measures.  This new guideline will re-enforce that the borrower has enough income to make BOTH mortgage payments without any rental income to back up.

The Final Verdict: This may kill a lot of deals out there and trust me I know, I have 2 in the works but will probably have to be re-structured or scrapped all together, but the Government is protecting their own assets and scams out there.  Who knows if this will be permanent or not but until then be aware of this change and talk to a professional mortgage expert in your area about alternatives.

 

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Sherry Peckhoon Sim
Sims & Company - Cayucos, CA
Broker/Owner, Covering the Beautiful Central Coast

Justin, that's good to know. All the more, we need to prequalify, and prequalify the buyers.

Sep 23, 2008 07:18 PM
Justin Williams
Independent - Virginia Beach, VA
Loan Officer

@ Sherry - Exactly! thanks for stopping by!

Sep 24, 2008 03:12 AM
Cyndee Haydon
Charles Rutenberg Realty - Clearwater, FL
727-710-8035 Clearwater, Beach Short Sales Luxury Condos &Homes

Justin - I wish you allowed reblogging of your articles - I would love to reblog this - great info. :)

Sep 24, 2008 03:51 PM
Justin Williams
Independent - Virginia Beach, VA
Loan Officer

@ Cyndee - oops didnt realize it was off, fixed it , re-blogg away :)

Sep 24, 2008 04:25 PM
Ken Graczak
LoanDepot - NMLS#174457 - Equal Housing Lender - Lake Elmo, MN
Loan Consultant - Minneapolis / St. Paul

Currently Freddie Mac will still allow this.  If you still have some deals, it might be worthy of a look.

Sep 30, 2008 04:24 AM
Jonathan Haug
Prosperity Mortgage Company, NMLSR: 246016 - Virginia Beach, VA
Mortgage Consultant

Ordering that appraisal to see if they have more than 25% equity is a risky thing to do too.. Could just be a waste of 300-500 bucks...

Sep 30, 2008 07:23 AM
Justin Williams
Independent - Virginia Beach, VA
Loan Officer

@ Ken - yes but with the recent August changes its still hard because you still have to show 30% equity and proof of rent deposit.  Still your right this may be another alternative.

@ Jonathan - Exactly, and as we know we don't like wasting our clients time or money, thanks for stopping by bud!

Sep 30, 2008 02:31 PM
Gene Allen
Fathom Realty - Cary, NC
Realty Consultant for Cary Real Estate

And I thought B & B was Bed and Breakfast.  Now I know better.

Oct 03, 2008 11:52 AM
Justin Williams
Independent - Virginia Beach, VA
Loan Officer

@ Gene - Too funny thanks for sharing your funny comment :)

Oct 03, 2008 05:24 PM
Tamara Inzunza
Realty One Group Capital - Alexandria, VA
Close-In Alexandria and Arlington Living

Good for HUD for making these changes.  I've heard the 'buzz' about the 'buy and bail' scam, and yes it's unfortunate that a lot of homes are not worth what buyers paid during the heat of the market, simply 'walking away' from a home just because should be prevented when possible.

Oct 04, 2008 10:10 AM
Justin Williams
Independent - Virginia Beach, VA
Loan Officer

Tamara - Exactly, People abusing the system just because it may be easy to do doesn't mean its right.  Thanks for comenting.

Oct 05, 2008 04:26 AM