Many people are finding out they are “upside down” on their home these days if they bought during the real estate crazy years of 2005-2006.  In addition, many those are not able to afford the payments on their mortgages as interest rates rise. In the metro areas that saw the biggest run up, Phoenix, Las Vegas, Sacramento, San Diego and much of Florida, some homeowners owe $250K or more than what their homes are now worth. Many have made the painful decision to just walk away, figuring good credit is not worth $250K.

A foreclosure is obviously bad for your credit score, decreasing your chances for a new loan and unsecured credit. In addition, Fannie Mae, the government-sponsored mortgage underwriter, recently revised the amount of time borrowers with a foreclosure must wait to receive a home loan to five years from four.

Faced with the possibility of not being able to purchase a new home, but needing to get out of their old one, some homeowners are increasingly turning to “buy and bail”, a practice where the homeowner purchases a second home before they walk away from their old home, leaving their credit to go down the toilet. With the extremely slow market, desperate Realtors are actually encouraging and in some cases coaching people who want to engage in this questionable practice.

So how does a cash-strapped homeowner qualify for a new loan to buy a home when they still have their old loan? Fraudulent rental contracts. Under Fannie Mae guidelines, homeowners can count rental income to cover up to 75% of the mortgage payments on the first home. I’ve seen this practice first hand. When I worked in the mortgage industry, I had several colleagues who actually drafted the rental agreements for their clients so they could qualify income-wise for a new loan. To thwart “buy-and-bail”, changes in underwriting guidelines will soon take place. New FNMA guidelines will no longer allow rental income to offset mortgage payments on other properties.

Has anyone you know done this?  How easy was it to get a new loan for the new property?

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