Industry NewsMortgage

FHA limits ‘buy and bail’ purchases

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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 pr...