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Friday, November 21st, 2008 at 5:25 AM

FHA’s Buy-And-Bail

I agree with the buy-and-bail premise, that it’s not right to go buy a new house and then let your old house be foreclosed.  But the new Fannie/Freddie rules (and VA) makes it tough on those who would like to build a portfolio of real estate by keeping their old house for a rental. 

The three requirements:

  • 30% equity in the residence you’re leaving
  • 6 months’ worth of PITI payments of both houses in the bank at closing
  • Must qualify to buy new one without using rental income on the old one

FHA is easier.

FHA requires that you have 25% equity in your old house, but they base your equity position on THE ORIGINAL PURCHASE PRICE, not today’s value.  While that doesn’t help those who have owned their old house for years, it’s a real break for people who bought at the peak.

FHA sticks with their regular guideline - NO RESERVES REQUIRED at all.

If you have trouble qualifying for both houses without the rental income on the old one, FHA allows for you to move into a third residence (in with parents, rent an apartment, etc.) for six months.  They’ll call the old house an investment property, and use the rental income towards qualifying.

DO NOT BUY-AND-BAIL!  But if you would like to legitimately keep your old home as a rental and can find a new home that’ll be in the FHA range, it can work.

Posted on Friday, November 21st, 2008 at 5:25 AM in Mortgage Qualifying | | Email Email | Print Print You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Reader Comments: 5 Responses

  1. If you bought at the peak, how is that good for you to rent it out?

    There’s just too much temptation to buy and bail if you bought at the peak. It won’t make a good rental because you’re bleeding cash flow at an enormous rate in the best case scenario.

    Face it, if you bought at the peak, you are screwed. The sooner people admit that they are not “investors”, the sooner they can fix to rebuild their balance sheet. Just my $.02

    chuck

    Chuck Ponzi | November 21st, 2008 at 11:04 am

  2. Your point is true to a degree, but the FHA is mainly there to help people buy their first homes. Not to help someone expand their portfolio and multi-leverage with 3% down. Home owners should really be buying with 20% down whenever possible, especially on extra houses. 3% down on multiple properties is the kind of speculation that got us into this bubble.

    I just saw an ad yesterday screaming 3% down for FHA, repeating “take advantage of the government while you can”.

    BDiego | November 21st, 2008 at 11:38 am

  3. To clarify, I’m referring to the FHA’s new requirement that you can’t use rental income to justify. A lot of times this rental income was just a pyramid scheme (rent at a loss so you can qualify to buy another home, rent that at a loss so you can buy another home, repeat until you’ve bought as many houses as possible and made a million dollars on appreciation). Other times, it was buy and bail.

    BDiego | November 21st, 2008 at 11:40 am

  4. Why exactly should government agencies (or GSE) be dealing with investment properties in the first place?

    Let the private mortgage market deal with it…

    Carnap | November 23rd, 2008 at 3:30 am

  5. Its amazing to me that FHA is giving 3% down loans to anyone in a market that is correcting as fast as this one is.

    Jay Jay | November 23rd, 2008 at 9:11 am

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