New "Buy-and-Bail" rule

User Forum Topic
Submitted by carlsbadworker on July 24, 2008 - 12:24pm

Credit to Jim from bubbleinfo.com. I think this is one of the very good news to potential first-time buyers. I see almost 50% of the buyers in the last few months are so called "investors" in the area that I'm interested in. This will limit their ability to leverage beyond what they can afford. A good side effect is to prevent "buy-and-bail" fraud, where the house owner purchases a cheaper house at today's market value and let his own expensive house foreclose.

Here is the details:

There is a new Fannie Mae and Freddie Mac rule that applies when buying another home before selling your old one.

Historically, the Buyer generated a lease agreement for the existing home and was allowed to use 75% of the lease income to offset payments on that home. Two months of cash reserves were typically required.

The New Rules require a borrower with a home in escrow, but not sold, to qualify on their ability to carry the payments on both homes, no lease income or rental survey income is allowed.

If the new home is a second home, the borrower has to show the ability to carry both payments and have six months PITI on both properties in documented reserves. If you are buying a rental property you can use 75% of the rental amount, but now you must provide documented evidence that you have at least 30% equity in the property. Additionally, there are detail requirements that must be complied with, i.e.- you have to provide the receipts of the security deposit from the tenant, and the deposit into your account. If you have less than 30% equity the rental income won’t count to offset your payment, you must now have six months reserves for both properties.

P.S. The rule applies on Aug 1, 2008.

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wow, interesting
Submitted by kev374 on July 24, 2008 - 12:28pm.

wow, interesting information..thanks!

This is great news. In fact,
Submitted by SD Transplant on July 24, 2008 - 12:50pm.

This is great news. In fact, I've got a friend that was trying to take advantage of this loop. He was looking to buy the house accross the street for $200,000 less....and once in...just bail on his current mortgage (aquired at the top of the market).

Finally...some common sense legislation

Just to be clear, consider
Submitted by gn on July 24, 2008 - 1:10pm.

Just to be clear, consider the following scenarios:

1. John currently owns & lives in a house. He has 30% equity in that house. He wants to buy another house to live in & rent out his current house. Does he need to be able to carry the payments on both homes to qualify for the loan ?

2. Mike currently owns & lives in a house. He wants to buy another house to rent out. The house he wants to buy is currently vacant. If Mike has a 30% down payment, does he need to be able to carry the payments on both homes to qualify for the loan ?

This is fantastic news. I
Submitted by PadreBrian on July 24, 2008 - 1:45pm.

This is fantastic news. I heard about it last weekend.

gn wrote:Just to be clear,
Submitted by PadreBrian on July 24, 2008 - 1:54pm.

gn wrote:
Just to be clear, consider the following scenarios:

1. John currently owns & lives in a house. He has 30% equity in that house. He wants to buy another house to live in & rent out his current house. Does he need to be able to carry the payments on both homes to qualify for the loan ?

2. Mike currently owns & lives in a house. He wants to buy another house to rent out. The house he wants to buy is currently vacant. If Mike has a 30% down payment, does he need to be able to carry the payments on both homes to qualify for the loan ?

The way I read it, yes on both. He will have to show he can afford to make the payment on both.

How do they determine that
Submitted by seattle-relo on July 24, 2008 - 1:55pm.

How do they determine that the property has at least 30% equity? Do they have a new appraisal done?

gn wrote:Just to be clear,
Submitted by gn on July 24, 2008 - 2:49pm.

gn wrote:
Just to be clear, consider the following scenarios:

1. John currently owns & lives in a house. He has 30% equity in that house. He wants to buy another house to live in & rent out his current house. Does he need to be able to carry the payments on both homes to qualify for the loan ?

2. Mike currently owns & lives in a house. He wants to buy another house to rent out. The house he wants to buy is currently vacant. If Mike has a 30% down payment, does he need to be able to carry the payments on both homes to qualify for the loan ?

Jim Klinge, SD Realtor & HLS,

Can you weigh in on this ?

Thanks.

In a bubbly or declining
Submitted by FormerSanDiegan on July 24, 2008 - 4:47pm.

In a bubbly or declining market this rule is an excellent one. However, as we approach reasonable values in San Diego, it seems like it will limit some legitimate would-be small-time investors as well.

I guess another reason why cash is king.

gn - I believe that the buy
Submitted by SD Realtor on July 24, 2008 - 9:39pm.

gn -

I believe that the buy and bail rule is a good thing for sure. However I do not know the specifics of it. HLS for sure would be the best resource to ask on this but I have not seen him post for awhile. Off the cuff I want to say the answer is yes to both of your scenarios "but" if John or Mike could come up with documented lease agreements it is unclear to me whether or not they could apply some or all of the rental income to the qualification process...

Sorry for the lame answer but I not an expert on this bill yet so I don't want to give false information.