Blocking the "buy and bail"
M. wrote:
… I found something out over Easter regarding moving from a two family to a single family that I had never heard about before.
If I own a 2 family home that I plan on keeping and I am qualifying for a mortgage on a new single family home. I can only use income from one of the units unless I have 30% equity in the MFH. It’s to prevent homeowners from buying a single family home and then letting the MFH go into foreclosure? I assumed that if you rented both units, the lender would consider both rents towards your new mortgage qualification.
My quick answer was:
It is an interesting question. However, I don’t think the qualification rules are as foreclosure-related as you think they are. It could be pure income guideline at work. FNMA counts part of rental income – not all of it – toward qualifying for another mortgage. FNMA may not be willing to count the second rental income unless the owner has a lease in hand from a verified (real) renter who will be moving in at a certain date. Since it is hard to pin a renter down months ahead of time, it may be near impossible to prove one has a renter.It is a similar problem that a SF house owner has when that owner is moving up or downsizing. Frequently, the owner cannot own both properties simultaneously because his/her income cannot carry that level of debt. Those owners need to sell their current house first, then buy the trade-up or trade-down property.
For a more detailed answer, I tapped Amy Tierce of Fairway Mortgage. From what she says, the lenders set these rules, at least in part, to limit the “buy and bail” tactic.
She writes:
When a home buyer wants to retain an existing property, a condo, single family home or multi family residence there are specific qualification requirements that have to be met if the buyer/borrower needs to use rental income on the retained property in order to qualify for the mortgage payment on the new property.The first requirement is that there be 30 percent equity in the subject rental property. This number has to be verified by the lender as part of the application process with an appraisal. Then the buyer/borrower has to provide a fully executed lease and along with evidence that they have received a deposit and that money has been deposited into their account. If the borrower qualifies carrying the payment on the retained property without needing to use the rental income then they do not need to do anything other than verify the monthly payments on the retained property.
These rules have actually eased since the early days of the mortgage crisis, at that time in addition to the equity, signed lease and deposit of a rental check the buyer also had to prove that they had 6 months of PITI (principal, interest, taxes, insurance and condo fee if applicable) in reserve funds for ALL properties, meaning the one they are retaining and the one they are purchasing. At that time it made is almost impossible for a home buyer to retain one property and buy a new one.
I believe that this requirement was designed to serve a couple of purposes. One is to prevent a buyer from doing a ‘buy and bail’ purchasing a new home and letting the other property go into foreclosure once the new loan has closed. If the buyer has 30 percent equity they are not likely to bail on the first property. Second is to prevent buyers from becoming over leveraged in real estate. If a buyer loses a tenant they have more financial options if they have equity in the property and more desire to keep the property in good standing.
It seems to me that the 30 percent equity rule reinforces Lance’s trope that foreclosure is prevented by forcing house owners to have skin in the game. What do you think? Are the rules set this way to prevent intentional foreclosure? Or are the rules set this way to keep future borrowers from painting themselves into a corner?
Did you buy and bail? Do you know someone who did? Did you want to buy and bail and got stopped because of your equity?
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