Buy and Bail

Have you heard the term, “buy and bail?” What does it mean and why is it controversial? With so many Sacramento area homeowners living in homes which are worth less than they owe and paying more in mortgage and property tax than they could rent a comparable home, it is no wonder they are frustrated and considering what is called a buy and bail.

Buy and bail is exactly what the name implies, buy a new home and then walk away from the current underwater house or do a short sale on it. For example John and Susan own a home in Roseville, which they bought in 2005 for $625,000 and financed 90 percent at 7 percent interest. Today they owe approximately $557,000 and their home is worth $300,000. They don’t qualify for a loan modification, they can’t refinance to get a lower rate because the home has no equity and they are angry. If they can qualify for another mortgage, they can buy a comparable home for $300,000 and finance it at the lowest mortgage rates we have ever seen. Once they move into their new home, they have now created a financial situation with two mortgages and the maintenance of two homes which will more than likely qualify them for a short sale. If not they can let the first home go to foreclosure. This is a buy and bail.

Buy and bail is not as simple as I described, lenders have policies against it and there is a moral question which is controversial.

To qualify for a new mortgage when you own a home which is worth less than your mortgage balance you have to find a lender who will even consider making the loan. For some lenders this will be an automatic decline. After you find a lender who will consider making the loan on the new house, you have to have a reason for moving such as; moving closer to work, need a larger home because of a growing family, better school district and the list goes on. The lender on the new home will not give any income credit on the first home, even if you tell them you plan to rent. This means your income must support both mortgages and some lenders will require reserves for these loans. Lenders will NOT make a loan on a second home if they suspect the buyer is going to walk away from the mortgage on the first home. This means the applicant for the mortgage has to have plan to keep the first home which is generally, “we can’t sell it for what we owe so we are going to rent it.”

Why are buy and bails controversial? As I said above, when buying the second home the applicant will not be disclosing their full intentions. In addition, a mortgage is a personal commitment to repay an obligation freely taken out. Many individuals feel a moral obligation to maintain their commitment. On the other hand there is a school of thought which says, “Lenders do whatever they have to protect their bottom line and shareholders, why shouldn’t we do what is financially best for our family?”

In my business I am getting more client inquiries about buying a second home and short selling the current residence. I understand the frustration of their situation and if successfully done the financial rewards can be very beneficial to the client. My approach is to represent my clients and do what is right for them and make sure they understand the risks and legal issues so they can make informed decisions.

If you or someone you know is thinking about buying or selling a home, please feel free to call me at the MagnumOne Realty offices in Roseville or send an email to juliej@jalone.com.