Buy and Bail

Buy and Bail

The term “buy and bail” is becoming more popular. This is where the homebuyer purchases a more affordable dwelling with the intention to cease making payments on the previous mortgage. The mortgage industry has tightened underwriting guidelines on primary residences that are pending sales or converting them into investment properties.

The following are guidelines for FHA and Conventional:

FHA – The following went into effect September 19.

On a temporary basis FHA will not consider any rental income from the property being vacated except as described below:
1.)Relocations: An executed lease agreement signed by the homebuyer and the lessee for at least one year’s duration after the loan is closed is required. Evidence of a security deposit and/or first month’s rent paid to borrower.
2.)Sufficient Equity in Vacated Property: The homebuyer has a loan-to-value ratio of 75% or less as determined by either a current (no more than 6 months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property.

Conventional – The following goes into effect October 1.

The current primary residence is pending sale that will not be closed (title transfer to the new owner) prior to the close of the new loan transaction, or the current primary residence is converting into a second home:
1.)The borrower must qualify using both the current and proposed mortgage loan payments
2.)6 months principal, interest, taxes and insurance (PITI-reserves for both properties are required, or as determined by Automated Underwriting
3.)If there is documented equity of at least 30% in the existing property a reduced reserve requirement of 2 months for both properties is permitted. The 30% equity in the existing property must be documented using a full appraisal or automated valuation model (AVM).
4.)If the current primary residence is pending sale, the PITI for the property for sale does not need to be included for qualification purposes provided the following is provided:
The executed sales contract for the current primary residence
Confirmation that any financing contingencies have been cleared
Evidence of PITI reserves as outlined above

If the current primary residence is converting to a second home the property must be located in an area that can reasonably function as a second home.

If the current primary residence is converting to an investment property there needs to be documented evidence of 30% or more equity in the existing property. The borrower may continue to use 75% of rental income to offset the mortgage loan payment amount.

The 30% equity in the existing property must be documented using a full appraisal or automated appraisal service.

The rental income must be documented with both a fully executed lease agreement and the receipt of the security deposit from the tenant and evidence of the deposit into the borrower’s account

Standard reserve requirements apply.

If equity of 30% in the existing property cannot be documented the borrower must qualify using both the current and proposed mortgage loan payment amounts.