New lender rules on ‘buy-and-bail’ to help, and hurt
A crackdown by mortgage lenders on a fraudulent practice known as “buy-and-bail” could make it more difficult for law-abiding homeowners to take advantage of today’s depressed market.
The scheme involves owners telling the lender on a new home that they plan to keep their old one as an investment. After escrow closes, they stop making payments on the first house and let it fall into foreclosure.
The scheme has caught on in recent months, as owners with unaffordable payments saw that they could buy a comparable home and pay less per month. Now lenders are adding restrictions to make it tougher to qualify for a mortgage if you plan to keep your old home as a rental property.
The new rules will potentially penalize honest buyers who don’t plan to defraud their old lender but simply want to rent out their old property while waiting for it to regain value.