Tuesday, July 8, 2008

Lending Guidelines tighten to prevent "Buy and Bail" Scams

I caught wind of some changing lending Fannie / Freddie guidelines...starting August 1st (and perhaps sooner), buyers who own homes and who are planning to purchase a second home must qualify for the new mortgage including BOTH mortgage payments in their debt-to-income ratio.

Currently, if a fully executed rental agreement can be produced, a lender will factor in 75% of the monthly rent as income to offset the mortgage payment of the first home. This is changing.

Lenders are doing this in response to "Buy and Bail" scams, where a homeowner will purchase a second home, and let the first home (that they are upside-down on) foreclose. Got news for you folks - this scam is fraudulent and illegal!

There are several nuances to these new lending requirements...Marlena Olson with Vitek Mortgage Group is a great resource - 916-486-6900. Ultimately I am glad these guidelines are changing, but in addition to preventing Buy and Bail scams, it is going to get more difficult for legitimate purchasers of second homes - talk to your loan officers NOW!


Anonymous said...

1. Whose lending guidelines are changing? Is this just one lender or a big market shift?

2. How will this affect legit landlords? Is there just a higher standard to prove that a property is a rented?

Specifics please!

erin@erinattardi.com said...

This is, how you say, a big market shift. These are Fannie Mae and Freddie Mac (federal) guidelines, which are the guidelines most conforming loans go by for underwriting. Lenders I know have received notice that Fannie Mae and Freddie Mac will use the mortgages of all owned properties (plus the one to be purchased) in the debt-to-value equation, require 6 months of monthly mortgage payments for both properties AND if the home is rented or going to be, they would like to see cancelled checks of the rents or the deposits. These guidelines are very new, so it will be interesting to see how many variations we see. If this describes you - get in contract to purchase before August 1 if you will have issues documenting rental income.

Brad L'Engle said...

Great comments at the forefront of changes in July. Of course, the rules continue to change and now FHA also requires a 25% equity stake in a retained house.

You and I work right around the corner as I am a lender with Comstock Mortgage!