Fannie Mae Removes Buy and Bail Rule
Approximately 1 year after the rapid decline of home values in the aftermath of the great real estate crash of 2007, Fannie Mae quickly identified behavior by homeowners that it considered to be a type of lending fraud.
September 19th, 2008, Fannie Mae instituted a fraud prevention policy called the Buy and Bail rule. A buy and bail transaction is where a consumer decides to rent out their primary residence to take advantage of buying a bigger, or better home for less than what they owed on their current home.
Buying a bigger and better home is not necessarily a bad thing, unless you took advantage of using the rental income from your previous primary residence to qualify for the new home….and then allow the rental home to go into foreclosure.
It’s hard to believe, but yes, this was happening often enough that Fannie Mae instituted restriction that made this next to impossible. Unfortunately, the buy and bail rule also hurt many people that legitimately had to move, and could not sell their current home because there wasn’t enough equity.
Old Buy and Bail Restriction
The Buy and Bail rule required anyone converting a primary residence into a rental in order to buy a new home to have a minimum of 30% equity in the rented home before you could use rental income to offset the mortgage payments due on the home.
As property values plummeted, this locked many folks out financially as it was near impossible to qualify for both payments in order to buy a new home. To sell the primary residence would mean a short sale, resulting in a minimum 3-4 year waiting period before qualifying for a new mortgage.
Using Rental Income to Qualify for New Home Purchase
With the real estate and mortgage crisis is mostly behind us, Fannie Mae has removed the equity requirement effective immediately. Fannie Mae’s Automated Underwriting System, also known as DU (Desktop Underwriter) will updated over the weekend of August 15th, 2015.
Now that the equity restriction has been removed, homeowners can rent out their current residence, and use 75% of the rents received to offset the mortgage payment on that home.
Documenting Qualifying Rental Income
If the home is already rented, you may use a copy of the current lease agreement and a copy of the deposit check as proof that the rental agreement has been executed.
If the home is not already rented, lenders may use market rent supported by a special form to establish what is typical for your local rental market.
Using Rental Properties for Qualifying Income
What makes the primary residence rental conversion guideline unique is that income from non owner occupied rental properties cannot be used to offset mortgage payments unless you have a 2 year history as a landlord. 2 years of full tax returns with a filed Schedule E showing rental property is required for establishing your experience as a landlord.