FHA "Buy and Bail" Sees New Underwriting Revisions

By
Real Estate Agent with The Devonshire Company

In yet another of what seems to be an endless stream of loan revisions, FHA announced that it will again tighten its underwriting guidelines when borrowers convert their existing homes into rentals in favor of another principal residence.

While I can understand the reasoning behind the latest news, it will only continue to make loans harder to obtain which may further hinder the economy by slowing homes sales, which includes those in the Denver real estate market. What the new restrictions will do is to make sure that borrowers will be more apt to pay both mortgages instead of defaulting on one or both properties.

The new restrictions will allow for two exceptions to the new rule:

1. The borrower is relocated to an area not within a reasonable commuting distance. In this instance, borrowers will be required to provide, at the minimum, a 12-month lease agreement signed by the borrower and the lessee. In many cases, the borrower may be required to provide evidence of the security deposit and/or first month's rent.

2. The borrower has at least 25% equity in the vacated property. This can be proven by an appraisal no more than six-months-old or by comparing the unpaid balance of the mortgage with the original purchase price of the property.

The idea of the new restrictions is to both protect property values in neighborhoods (homes may be indirectly affected by this type of occurrence if properties around them continue to go into foreclosure) and to protect FHA and HUD from more foreclosures on properties in their portfolios.

Click here to read Mortgagee Letter 2008-25 in its entirety.

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