Over the past few weeks I've heard a distributing trend...homeowner's are purposefully allowing their primary

Asked by Lashae, Minneapolis, MN Tue Aug 26, 2008

residence to go into foreclsoure. WHY? Because they've purchased another home of similar quality for a lower price and plan to "start over". What are your thoughts on this? Will the government soon catch on and require more than just your home as collateral in the future? How can homeowner's do this and not expect the cycle of the depressed market to continue?

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Bill Eckler, Agent, Venice, FL
Sun Feb 24, 2013
DATED POST......Yes, this is a most unfortunate turn of events but like any other "loop hole"....it's a matter of time before it is closed.
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KJ, Home Buyer, Minneapolis, MN
Sun Feb 24, 2013
Sorry, although this is an old thread, the recommendations to bail the properties were made by real estate professionals like you. I know, cause I received these suggestions and acted on it. My stupid mistake for trusting them.
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Kathryn Bowm…, , Seattle, WA
Tue Aug 26, 2008
Seems kind of short-sighted to me. The homeownes who do that are ruining their credit rating. And to think that credit ratings are important for getting any kind of decent loan in the future, and even getting a job! ... The lending institutions are cutting back, making it very difficult to get new loans. ... I don't think homeowners who do things like that really care about the greater good of a non-depressed market.
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Other/Just L…, , Fleming Fitch Grant, Holly Hill, FL
Tue Aug 26, 2008
Aaron is correct below; I'll had specifics from a lending perspective.

The practice you describe is known as "Buy & Bail"... a term which now joins other nefarious schemes such as NINJA loans (No Income No Job or Assets), Liar Loans, Equity Stripping, and Jingle Mail (when a home owner mails the keys to the lender and abandons the property).

Fannie Mae has addressed this issue with specific guideline requirements put into practice earlier this summer.

Any home owner wishing to convert a primary residence to a second home or investment property must show 6 months of reserve payments for mortgage principal, interest, property taxes, and home owner's insurance for BOTH the current home and the new home.

If a home owner wishes to convert a primary residence to a renatl and wishes to use the prospective rental income towards qualifying income, he/she must provide an executed lease, copies on cancelled checks from the tenant for security & 1st months' rent, and prove 30% or more equity in the current home via appraisal or BPO. If the equity isn't there, the rental income doesn't count.

In either case, the home owner must qualify for BOTH mortgages.

This rule change combined with Fannie & Freddie limiting borrowers to just 4 properties financed (as before 2003 or so) will make investment property difficult and very expensive.
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Aaron Dickin…, Agent, Champlin, MN
Tue Aug 26, 2008
Lenders are already addressing this by not taking into account any rent income that the buyer is getting from renting their existing home. The buyers will now have to qualify for both payments on their own. A lot of the rental contracts were not real or the renter moved out suddenly and the buyer couldn't swing both loans. This should be largely prevented in the future.
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