The FHA is cracking down on a practice called "buy and bail" by tightening up on lending guidelines on 2nd homes and rental income. "Buy and bail" refers to when a borrower buys a second home and then immediately defaults on their principal residence.
Borrowers are doing this because they can't afford the mortgage and/or are upside down on the value of their principal residence and can buy a comparable home for much less in today's market. And most borrowers are lying about rental income on their principal residence in order to get the loan on the 2nd home.
Here's an excerpt from the full article on HousingWire.com:
"Under guidance set forth in a Mortgagee Letter released on Friday, underwriters may no longer consider rental income from a property being vacated in most circumstances, and must ensure that the homebuyer can manage payments on of the full debt service of both mortgages"
Previously, lenders were typically factoring around 70 percent of one year's potential rental income into the equation when qualifying a borrower for a 2nd home. Now that amount is zero.
Note that the new guidelines also apply to situations where the FHA has not insured the mortgage being "bailed on".
The foreclosure/bank-owned and short-sale portion of the Loudoun County real estate market has been steadily improving over the last 6 months. But last month brought some of the best news we've had in a long time - demand outpaced supply!
For the first time since the market turned, there have been more distressed properties sell than new ones come on the market in a one month period. August had 326 distressed properties sell versus 306 new ones come on the market.
Here's a graph showing new listings (supply) versus solds (buyer demand) for 2008 (click to enlarge):
Notice that in January, the number of new listings was more than double the amount of solds. Since then, the number of solds has been steadily increasing. The number of solds in August was more than double those in January.
As for inventory, there was a spike in new distressed property listings last spring, but it's back down to the 300 per month level.
This is very good news for not only the foreclosure/bank-owned and short-sale property market, but the Loudoun County real estate market in general. The key ingredients to a stabilization of the market is lower inventory and higher demand, which is what we're seeing across the board in Loudoun County.