Buy and Bail in Illinois: Q & A

What is Buy and Bail?
 Buy and Bail is a version of strategic default. The owner of a severely underwater house or condo buys a new house.  After they close on the new house, they either try to short sell the old home or stop making payments on it and strategically default on the old house.

What is the advantage of Buy and Bail?
 If a homeowner sells a home in a short sale or stops paying and loses the home to foreclosure in a strategic default, the owner will be unable to buy a new house for between 2 and 5 years.  The hit to the owner’s credit will stop them from qualifying for a new mortgage. Buy and Bail allows you to own your new house at today’s low prices and avoid renting.

Is Buy and Bail illegal or unethical or both?
 Go ahead and google “Buy and Bail” and you will see many blog posts that say it is fraud to buy a new house with the intention of dumping the old one. I disagree with that. It is loan fraud to lie on a loan application. But most loan applications just ask for your financial data and don’t require any statement concerning your current home. I have seen mortgage lenders ask the buyer for a statement explaining why they are buying a new house in the same area as their current home. Most clients explain that they have a growing family and want to take advantage of the low prices to buy a bigger house. As long as you qualify for the new loan and don’t misstate  anything on the application, there is no fraud involved in my opinion. It is total loan fraud to do a fake lease on your current property. Don’t do that, please. The rental income probably won’t help you qualify for the loan anyway (see below). I will leave the discussion of whether Buy and Bail is unethical to greater minds than mine. That is up to you to decide. Blog comments on Buy and Bail  range from “everyone who does it should be shot” to “the banks caused all this and they deserve it.”

Do I have to qualify for both mortgages?
 Yes, you pretty much have to have a high enough income that you qualify for the old mortgage and the new mortgage. Take your gross monthly income times 28% and your mortgage payments on both places cannot be more than that amount. You have to have a pretty good income to qualify. Many people apply for an FHA loan, which is only 3.5% down as the new mortgage. You can get an FHA mortgage as long as the mortgage on your old home is not FHA. They only allow one at a time. Some get Homepath financing, which requires only 3% down, has no PMI and is offered on the sales of many FNMA foreclosures.

Will my mortgage lender let me count rent I receive as income?
 Probably not. Fannie Mae and Freddie Mac cracked down on Buy and Bail a few years ago and they only allow rental payments to be considered as income if you have 30% down or more in your “old” house. Most people have little to no equity in their current house, so they can’t count the rental income.

Will my new mortgage lender call my loan due if I stop paying on my old house?
 No, the two loans are totally independent of each other. If you decide to Buy and Bail your credit will drop to the low to mid 500s and will stay there for several years. This explains how quickly credit recovers after a foreclosure or short sale.

Will my old mortgage lender try to take my new house from me? 

Buy and Bail is really a strategic default. This post explains the risks in a strategic default and the same applies to Buy and Bail. If you have a second mortgage, it is not wise to Buy and Bail because the second mortgage company likely will try to sue you separately from the foreclosure.

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