Not wanting to be involved in financing "buy and bail" home purchases, the Federal Housing Administration will no longer count rental income when home buyers choose to vacate, rather than sell, their principal residence.

Home buyers seeking to rent out their existing home and buy another with an FHA-backed mortgage must now demonstrate they have sufficient income to pay both mortgages. The FHA won’t allow lenders to count rental income for the home being vacated unless borrowers have a 25 percent equity stake or can prove they are relocating for employment and obtain a one-year lease on the home being vacated.

The new rules are intended to prevent the practice known as "buy and bail," where the buyer purchases a more affordable dwelling with the intention to cease making payments on the previous mortgage, FHA said in a letter spelling out the new guidance for lenders.

Because FHA will insure principal residences only, and not income properties, the property being vacated by definition could not have an FHA-insured mortgage. But if the property ended up in foreclosure, it might have an impact on the value of nearby homes with FHA-guaranteed mortgages, the administration said in justifying its actions.

The new rules took effect Sept. 19, and are temporary pending a determination whether a permanent rule change is needed. The rules apply only to a principal residence being vacated in favor of another principal residence, and not to existing rental properties disclosed on the loan application and confirmed by tax returns, FHA said.

***

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