A recent mortgagee letter released by the US department of Housing and Urban Development (HUD) to crack down on a practice termed “buy and bail,” which the “Federal Housing Administration (FHA)”:http://www.fha.com/ has observed as a rising problem. In a “buy and bail” a borrower buys a new home for less money with the intention of immediately defaulting on their current principal residence. The purchase of the new, less expensive property is made possible by the borrower providing misleading or false information concerning the rental income of the principal residence, which allows them to qualify for the new mortgage.

In order to put a stop to this practice, mortgage letter 2008-25 bans the underwriting analysis from considering “any rental income from the property being vacated.” According to HUD this will “assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage of the property being vacated.”
The letter makes certain exemptions to this new rule, such as when the buyer needs to relocate for a job, either because they have been hired by a new employer or are being transferred by a current employer. This rule also does not apply when existing rental properties have been disclosed on the original loan application and can be verified in tax returns.
To read the full letter, complete with all exemptions, click here.