South Orange County Blog from Bob Phillips

Are you being stymied by the “Buy & Bail” policy of your lender?

Posted in Foreclosures, Real estate by southorangecounty on February 24, 2010

I learned something interesting from my preferred lender this morning.

About a year ago, enterprising people started a new phenomenon which later became known as a “Buy and Bail”. Some, who were increasingly upside down in their present home, saw how low prices were getting on a bigger or better house, ( maybe even across the street.) and so they made an offer on the new house, stating to the lender that they would be renting out their former house – a common, and valid tactic – until last year.

After closing escrow on the new house, however, they simply stopped making the payments on the old one, making that lender foreclose on the property. Hence buy, ( new.) then bail.( from the old property.)  After about 6 months of this situation, lenders wised up and instituted new tougher guidelines, wherein a buyer had to have at least 25% verifiable clear equity in both properties – that qualification brought buy and bail transactions to a screeching halt – and rightfully so.

This new stricter policy has ended buy & bail, but it has also stopped a lot of people who would really have rented their old place out, from being able to qualify for such a transaction.  Most move-up buyers are pulling equity from their old place, to use as a down payment on the new one, and in most cases, doing so didn’t leave at least 25% equity in the old property, or provide a 25% down payment on the new property.

Stymied by such a scenario?  Here’s a different thought, and possible solution.

If you move out of your present house, and put a tenant in it, say on a year’s lease – after 6 months, the buy & bail policy no longer applies – meaning you DON’T need 25% equity in the house you moved out of – in order to obtain your financing on a new house.

So, where do you live for the 6 to 9 months it takes to establish that “seasoning”? Well, you can either lease a house for a year, and after the obligatory 6 months have passed, be in a perfect position to purchase the new house with no such restriction – and NO contingencies.

OR, if you’re really lucky, you could find a house that is suitable, now, and if it’s on both the rental and for sale markets – as many houses are, these days – make them a lease option offer, planning to close escrow well after the 6 months of renting the old house.

You could also put a stipulation into a regular one year lease, that, towards the end of the lease, if the owner was interested in selling, they would give you the first opportunity to buy the property. That happens more frequently than you might imagine.

Looking for a Realtor capable of thinking outside the box?  With over 33 years of successful local experience, it would be my extreme pleasure to add your name to my list of happy clients.

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