OK, hold on to your life jackets. The Federal Housing Administration (FHA) has made an important change in their guidelines that affects us all. Feel free to read Mortgagee Letter 2008-25 but here's the gist of it.
HUD is trying to avoid a practice known as "Buy and Bail," where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Not good. So here's the deal going forward: If a borrower wants to hold on to their current property (and provide the lender with a lease agreement) and purchase another, HUD is allowing this under two conditions:
1. Relocation
Homebuyer is relocating with a new employer, or transferred by current employer to an area not within resonable commuting distance
2. Sufficient Equity in Vacating Property
Have a minimum of 25% equity in the existing property (departing residence), as evidenced by a current appraisal (no older than six months old) or by comparing the unpaid principal balance to the original sales price of the property
Yes, this is utterly unfair to move-up buyers who have legitimate leases in place, but here's a ray of light in darkness: this change is only temporary "while FHA analyzes this situation to determine whether permanent measures may need to be taken." And remember, your borrower can always go Conventional if they meet the guidelines.
Have a productive week.
Juanita
