FHA Guidelines Tighten On 2nd Homes, Rental Income
September 25, 2008 by Danilo Bogdanovic
Filed under Real Estate Investing
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".
Check out the full Mortgagee Letter here.
There are some legitimate buyers being hurt by this law, who have no intent to bail from their existing homes. But I do understand the premise behind the new guidance. Hopefully it truly is temporary.
Unfortunately, that’s the case. But at least this reaction by the FHA is only temporary.
Sadly this rule is beginning to claim victims. I am one of them. My mother and I share the home that she and my father built and I grew up in. When my dad passed away twelve years ago, I moved back home because she could not afford to live on her own on her minimal salary. Although as a widow(er), you can claim your spouse’s Social Security, you have to wait until you reach the age of 60. My mom was 47 when my dad died. So I became her roommate. The house needed repairs several years back so she tried to refinance. Because of her low income (even though SHE made her payments on time) the bank with whom she had the mortgage refused to refinance the home for a home equity loan for home improvements. Because I wanted to help my mom, against my better judgment, I offered to assume the mortgage so that we could repair and update the house.
Flash forward to 2008, my mom turned 60 last year, currently receives widow’s benefits on my dad’s social security every month has gotten a significant raise and between the two can afford to assume her mortgage again. Knowing this, I began the process of building my own house back in February. The home mortgage lending climate has changed dramatically since then. This new rule about rental property is extremely unfair. It is assuming that every potential homebuyer is going to buy and bail. The mortgage on the home I am building is double the amount of the mortgage on my mom’s home. According to the letter put out by HUD, these “bail and buy” people are buying cheaper homes and bailing on the more expensive property. My mother will continue to live in HER home and will eventually refinance it to put it back in her name. In the meantime for the purpose of my new home loan she is going to make the mortgage payments and for formalities sake, lease HER house from me. This new rule, however makes it impossible for me to do this not to mention that the debt to value ratio on the her house fell short by 1%, a mere $2000 shy when the house was appraised. This slight difference makes it impossible for me to qualify for an FHA loan under the new guidelines. The bank will not accept buying down the principal for the appraisal shortfall. Long story short, if my mom can’t get approved to buy back her house, I will lose the home I spent the last eight months building.
How’s that for sour grapes!
J,
Your situation depicts what is happening to honest homeowners because of the actions of those what cheated the system.
I don’t know of a solution off the top of my head, I can share your story with a few others that might (if that’s ok with you).
Danilo
Dear all,
I am facing a similar situation. I have lived in my 1 bedroom condo for about 2 years now. Back in July, I started the process of looking for a larger place. I received a pre-approval letter and good faith estimate for an FHA approved loan. Weeks have gone by and the loan officer insisted she needed more time to clear the mortgage. She asked for more paperwork and a co-borrower for the loan. I have provided everything she has asked for. As of yesterday, October 29, 2008, the loan officer emails me and states that I have an income shortfall and that I will need to come up with a 3rd co-borrower. This is impossible at this point!
My co-borrower and I are making over$ 100,000 a year, have other assets, excellent credit scores and retirement accounts. The whole reason I can’t get approved for this loan is that the mortgage on the condo ($1300) is counting against me as 100% debt. I have listed it on the MLS for rent, but I cannot get any credit for rental income.
What do I do? I need more space. I have a baby on the way and would like to purchase a 2 bedroom home.
PLEASE - can anyone help me??
Ms. T,
I’m sorry to hear that you’re one of the many who are getting the short end of the stick with these guidelines.
Unfortunately, I have no control over lending guidelines nor am I a lender. If you’d like, I can pass along your information and situation along to a lender who I have worked with closely for 6 years. If anyone knows how to help you, it would be him.
If you’d like me to do that, please email or call me (contact info at top of right hand column).
Danilo
After the market changed, I heard a lot of people say that FHA would take over the slack. But FHA isn’t now and never has been a loan of last resort - which sub prime was. For one thing Chicago FHA Loans are full doc.
mortgage rates,
You’re correct that sub-prime was the loan of last resort for years. But, in some ways, FHA is now the loan of last resort because it requires only 3.5% down.
With the economy the way it is and people’s savings in trouble, coming up with a down payment is harder than ever. Unless you go FHA (or a similar program such as VA or VHDA), you’re looking at putting down at least 10 percent, if not 20 percent.
And no matter which loan program you go with, you’ll have to go full-doc - the days of no-doc loans are gone.