FHA Clamps Down...Again

I am quite sure Benjamin Dona will write a much more insightful post about this, but the FHA has clamped down guidelines again in order to stem the “buy and bail” buyers. Essentially buy and bail is when a person purchases a new home, vacates their old house and claim that they will be renting it out to offset their debt to income ratio. They then let the old home go to foreclosure with no intention of renting it out.

Until now, all that was required for FHA in this situation was a lease agreement. No more. FHA has instituted new underwriting guidelines that require the borrower to qualify for both mortgages. Lenders are now NOT allowed to consider any rental income from a property being vacated by the buyer.

There are however 2 exceptions that do allow rental income to be considered in the DTI’s of a borrower:

- Relocations: If a person either is being relocated with a new employer or transferred by the current employer to an area not within a reasonable commuting distance. In this case a lease agreement will suffice, however underwriters are encouraged to obtain evidence of security deposit and/or evidence that the first month’s rent was paid.
- Sufficient Equity: If the borrower has a LTV 75% or less, a lease agreement is sufficient and the rents will be considered as income.

These new guidelines only apply to the specific situation of a buyer vacating her own residence in favor another principle residence. It remains to be seen how this will impact the mortgage world, but I have seen more and more people renting their homes out to take advantage of the buyer’s market while riding out the soft seller’s market.

Locally, the Indianapolis real estate market is a great rental market especially in more desirable areas. For example, Zionsville homes and Noblesville homes are typically quite easy to rent and can normally demand a high enough rent to offset a mortgage payment. These new guidelines might exclude a few move up buyers without much equity in their homes, but I don’t see it having a devastating affect on the industry.

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