HUD has issued a new directive which puts an end to a popular qualifying technique for buyers who have negative equity in their current home. In the past, if a prospective buyer had negative equity in their current home, we could in some cases qualify them for an FHA loan to purchase another home by having them lease their current residence and using the rental income to offset their existing mortgage payment. The new HUD directive, which is EFFECTIVE IMMEDIATELY, requires the borrower to prove that there is at least a 25% equity position in their current home via a current appraisal in order to use rents to qualify.
This directive is to prevent the "buy and bail" issues that are running rampant throughout the market. Conventional loans have been subject to similar restrictions for the past several months.
Note: An exception will be made for a borrower who is being officially relocated to an area that is not within a typical commute to their current home. If that exception can be made, HUD requires a valid, executed lease and evidence that a security deposit has been paid by the renter.
Comments(1)