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.