As of September 19, 2008, HUD formulated an official “Buy and Bail” policy. This was done in response to a common fraud perpetrated on banks by homeowners in declining markets. They would buy a new house for much less than was owed on their current home, indicating on the application that the current home would be converted to a rental (and use the proposed rental income to qualify for the new purchase). Of course, once they got the new cheaper home they just gave the old house back to the bank–never intending to make both payments. The new policy was created to thwart such fraudulent activity while still allowing those with good intentions to buy new homes before selling old ones.

So if you own one home, are buying another as a primary residence, and wish to use FHA financing, you have new rules to deal with. If you are converting your current home to a rental property, you will be able to include the rental income in your ratios if at least one of the following is true:

1. You are relocating with a new employer or transferring to a different location for your current employer, and the new job is not within a reasonable commuting distance.

2. You have at least 25% equity in the existing property. This can be shown with a current appraisal (for example, you owe $150,000 on the property and an appraisal shows the value is $200,000). Alternately, you if you have paid down your mortgage to 75% of the original purchase price you also qualify to count rental income when qualifying for your new mortgage. So, if you bought a home for $200,000 and took a loan for $190,000, once you have paid the balance down to $150,000 you qualify to count the income. You will not need an appraisal and will not be penalized if your house value has decreased.

These guidelines allow those with little equity in their homes to convert them to rentals and count the income when applying for a new home loan–as long as they truly need to move. Those with more equity have no restrictions because it is less likely that they would abandon an assets in which they are substantially invested.

For once, “It’s a Great Time to Buy!” isn’t just a bunch of real estate industry hype. Remember, these people were crowing, “It’s a great time to buy!” right up to the moment the housing market crashed and proved that salespeople are not the best industry forecasters, duh. But current economic and market conditions are in fact creating an environment for buyers that may be extremely favorable but not long-lived.

Incentives created by the newly-signed housing bill HR 3221 are designed to provide a quick shot to the housing market and may not be around long. Effective immediately, there is a first-time buyer credit (which others not technically “first-time” buyers may qualify for as well) of $7500, but it expires July 1, 2009. Conforming, FHA, and VA loan limits, which were raised as part of the economic stimulus package, will drop in many areas, although the new law raises the limits somewhat higher than limits in place before the stimulus package passed.

In addition, interest rates have been inching up. While still relatively low, many economists feel that rates are far more likely to increase than decrease in the coming years. And while buyers can’t be absolutely certain that the housing market has completely bottomed out, most experts say that the only way you know prices have hit bottom is when they rebound–and at that point its too late to take advantage of it.

What today’s buyers can take advantage of are lower home prices, fairly low mortgage rates, tax relief, and higher loan limits (meaning lower prices and greater availability for financing). If you can afford it and home ownership makes sense, you may never find a better time than the present to make a solid investment.

One of many proposed changes to FHA lending is the implementation of risk-based pricing. Most of us are familiar with this practice if not the term for it. For example, when you get your car insurance, your rate is partially determined by your driving record, where you live, and the kind of car you drive. No one expects to pay the same for insurance as someone else. If you live in a quiet suburb, drive a 4-year-old station wagon, and the only ticket you ever got was for forgetting to feed a parking meter, your rate is lower than your big-city friend with the new ‘Vette who’s on a first-name basis with the traffic court judge. “Pay to Play” makes sense to most people in that context.

The same thing is happening with housing. Fannie Mae and Freddie Mac started the trend, charging more or requiring larger down payments for homes in declining areas, for borrowers with lower credit scores, and for financing certain types of property like manufactured housing and condo projects. The idea is to have the borrowers with the greatest chance of defaulting pay more instead of forcing everyone to absorb the cost of the rise in foreclosures.

So what does it mean to borrowers who choose an FHA loan?It depends. FHA’s costs have increased, in fact for the first time in its history the agency will be unable to cover losses caused by borrower defaults. So more money is needed, and it can come from either the taxpayers, from all FHA borrowers in the form of across-the-board fee increases, or in the form of a selective increase to those who are at higher risk of defaulting. So if you have good credit you won’t likely be hit with an increase in funding fees if this change goes through. Riskier borrowers with marginal credit histories would be expected to come up with a little more.

A New York Times story claims that while politicians are getting a lot of media play with claims that homeowners in financial trouble will be rescued by the Federal Housing Administration (FHA), the agency itself may not be capable of that feat. FHA has been successful largely due to the fact that buyers are required to purchase insurance and until now the premiums were always sufficient to cover losses triggered by defaults.

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HUD Secretary Alphonso Jackson announced his resignation March 31 in the wake of investigations concerning allegations of favoritism after he paid a friend $362,000 to serve as a construction manager in New Orleans. Jackson is also being sued by the Philadelphia Housing Authority due to his alleged interference in a land deal.

The Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) can potentially provide relief to borrowers facing foreclosure as part of the mortgage mess. We wonder if his successor will focus on helping the nation’s families who’ve been victimized by shoddy lending practices, and unchecked greed.

In keeping with lame duck Presidential tradition, George W. Bush recently pardoned a number of convicted criminals including Timothy Alfred Thone, who was convicted of making a false statement to the US Department of Housing and Urban Development (HUD) to get a mortgage loan. During the past year, several federal indictments have been made including multiple counts connected with various types of mortgage fraud including house flipping schemes, “straw” buyers, and fraudulent mortgage applications for FHA/HUD mortgages.

Will Bush pardon more mortgage scammers? Will he encourage current and potential mortgage fraud by pardoning more criminals who’ve helped bring the mortgage industry to its knees, while cronies such as John Mc Cain continue to blame homeowners for the mortgage mess? Stay tuned, folks.

In an effort to help homeowners, HUD is temporarily changing the FHA loan limits. Effective March 6, 2008, the new FHA loan limits range from $271,050 to $729,750. The new maximum amount of $729,750 will only be available in extremely high-cost metropolitan areas, for comparison, the previous limit in these areas was $362,790. Use this interactive map to view the FHA loan limits in your area.

The temporarily increased FHA loan limits are part of the Economic Stimulus ACT of 2008 and are believed to help provide liquidity and stability in the volatile housing market in the US. These temporary increases are effective until January 2009 and then the limits will decrease to their previous amounts unless the U.S. Congress approves a legislation to permanently increase loan limits.

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