When I first heard of the buy and bail concept, a few weeks (or was it months, time flies when your having fun) ago, I must confess the first thought that flashed through my mind was "who would do that"?
That initial thought lasted about three seconds before I transitioned to, "Oh yeah, I can see that happening". With declining property values, even people with otherwise good credit as saying "get me out of here". They are purchasing a new property at today's market value and then letting the home that they are underwater on go into foreclosure. What a world we live in, even in little ole Greenville, NC!
Fannie Mae has recently announced their new guidelines for converting a principal residence to a second home or investment property. Buy and Bail!
- If a customer is purchasing a new home prior to selling their existing home they must qualify with both payments (PITI, lender lingo for principal, interest, taxes and insurance). If the equity is less than 30% (market value less than amount owed) 6 months reserves are required. If equity position is 30% or greater 2 months reserves are required.
- If a customer is renting out their existing residence the borrower must also qualify with both payments. Rental income can only be used if the equity position is equal to or greater than 30%. Note only 75% of the rental income can be used, even then, for qualifying purposes. An executed 12 months lease and proof that a security deposit in the customers' account is required.
- If a client's pending sale for the existing home blows up before the closing of their new purchase, or will not occur prior to the new home closing the rules are a little different but similar to the first explanation. The payments for the existing home are not required for qualifying purposes if reserves can be documented along with a copy of an executed sales contract and confirmation of all financing contingencies are provided.
- DU (fannie mae's automated underwriting engine) may decision less in reserve requirements.
Complicated, somewhat. I welcome any comments for further clarification.
FHA's Buy and Bail Policy is a bit different
What are reserves you ask? Look forward to additional postings.
Jay Williams
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