Home Loan News
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2/14/2014 Understanding The “Buy and Bail” RuleOver the past few years lenders have been consistently implementing new guidelines to protect themselves from unnecessary losses. The real estate and mortgage “meltdown” that began in 2008 taught the finance industry that we are constantly vulnerable to market shifts and greed. The “Buy and Bail” rule is one change that has affected many homebuyers.... “Buy and Bail” Explained: During the housing bubble, many homeowners strategically purchased a new home with the intention of bailing on the old home. Here is how it works:
Johnny Homeowner knowingly lied to the lender about renting his current home and provided false documents. This is mortgage fraud. How Lenders Are Stopping This Fraud: Many lenders now require buyers to qualify for the new home loan using the debt from payments on both homes (the new home being purchased and the old home being rented). There is an exception for buyers leaving a home with at least 30% equity. This is because lenders know the buyer won’t be “bailing” on the old home if it has sufficient equity. These buyers can offset the existing home’s payment with income from a renter; so they are only qualifying with the new loan payment. HOW YOU CAN USE THIS: Educate those you know who are buying a new home and planning to convert the home they are vacating into an investment property. Make them aware of this “Buy and Bail” rule and how it directly affects them. They may be endangered of not qualifying due to insufficient equity on their existing home. If you have any questions as it relates to the “Buy and Bail” rule or any other lending guidelines, contact us...we’re here to help! Comments are closed.
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