FHA Buy and Bail Rule

The FHA Buy and Bail rule has been in effect for several months and this is old news to many but, last week I received call from a real estate agent seeking what appeared to be a "Buy and Bail loan for one of his clients. So, I thought I would write this reminder

Because values have declined in most areas making it difficult to refinance many homeowners decided to purchase another home while their credit is still good claiming they will rent their existing home. Once their new home closed they then allowing their existing home to go into foreclosure and a new term has emerged "Buy and Bail"

To halt Buy and Bail fraud FHA and Fannie Mae have enacted new rules.

CONVERTING AN EXISTING HOME TO A RENTAL

FHA now requires buyers who are legitimately purchasing a home and converting their existing home to a rental either qualify for both loans or have 25% equity in their present home.  Fannie Mae previously instituted their own Buy and Bail rule.

EXCEPTION:

Relocations: The home-buyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance. A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year's duration after the loan is closed is required.  FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month's rent was paid to the homeowner.