I recently wrote a post on Fannie Mae's buy and bail policy, so I thought it appropriate to address FHA's guidance on the issue.
This guidance is designed to assure the homebuyer can make payments on the full debt service (PITI) for both mortgages when vacating a property and purchasing a new one.
Rental income for the vacated property can not be considered except under two conditions:
•1. Relocations: the homeowner is relocating with a new employer or is being transferred with a current employer. This must be to an area that is not within a reasonable and locally recognized commuting distance.
•2. There is sufficient equity in the vacating residence. The equity position must be 25% or greater.
Required documentation when utilizing the relocation exception:
•· A fully executed lease agreement
•· The lease term must be no less than 12 months from the date of closing for the new residence
•· Evidence that the security deposit and/or first months rent has been paid
Required documentation when using the sufficient equity position:
•· The original purchase price of the vacated property
•· An appraisal that is not less than six months old
If the homebuyer has already been renting the property for at least three months before the date of the application the buy and bail requirements do not apply. In other words they had previously vacated the property and have been renting it for more than three months.
So you may ask, if my client falls under one of these two exceptions how much of the rental income can be used? In my area; Eastern, NC, Pitt County, Greenville, NC, you can use 85% of the rental income. To check your areas vacancy rate click here.
Note you can only use the rental income to offset the PITI of the vacated residence. As an example if 85% of the rental income is $1,500.00 and the payment is $1,200.00 only $1,200.00 in income can be used for qualifying purposes.
There is no mention of reserves as there is under FNMA's buy and bail statement.
To view the FHA Mortgagee Letter click here.
Working to help you serve more customers, save time and make more money
Jay Williams
www.myhomeloanwithjay.com
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Interesting Jay. I have one lender in my area that says they can do the relocation without it being beyond a reasonable commuting area. They need boat loads of documentation on why the new house "makes sense" i.e. moving from a trailer to a house with a big yard, and then even more documentation on the new tenant. I haven't used the lender for this program yet, but he is a reputable direct lender with whom I have done business. Happy THanksgiving.