The buy and bail scenario often tempts homeowners who feel trapped by their underwater mortgage. Essentially, they purchase a more affordable home by obtaining a new mortgage under false pretenses, claiming their current home will become a rental property to qualify. After approval, they move to the new house and stop paying the mortgage on the original property, which then goes into foreclosure.
This practice is considered mortgage fraud because it involves deliberate misrepresentation on the Uniform Residential Loan Application (Form 1003) about the intent to rent the original home. Accurate and honest disclosure is mandatory when applying for a mortgage. Misleading lenders destabilizes the housing market and can lead to severe penalties.
For example, a homeowner who bought a condo for $500,000 now owes more than its market value. They find a cheaper house, falsify a lease agreement to show rental income, obtain approval for a new loan, then stop paying the original mortgage. Aside from foreclosure and credit damage, this fraud can trigger federal investigations and felony charges.
The consequences include serious legal penalties like prison time and fines, long-lasting credit damage, deficiency judgments requiring repayment of loan shortfalls, and difficulties qualifying for future mortgages—especially with government-backed agencies such as Fannie Mae and Freddie Mac.
It is important to distinguish buy and bail from a strategic default, where a homeowner voluntarily stops paying the mortgage but does not commit fraud. Buy and bail involves active deception, while strategic default is a financial decision without fraudulent misrepresentation.
If facing negative equity, alternative options exist, such as loan modification, short sales, or deed in lieu of foreclosure. These solutions are legal and offer structured ways to manage mortgage difficulties. For example, working with your lender to modify loan terms or pursuing a short sale can mitigate financial damage without fraud. To learn more, see Mortgage Loan Modification, Short Sale, and Deed in Lieu of Foreclosure.
Before deciding, it’s crucial to consult with your lender or a HUD-approved housing counselor who can guide you through lawful options to resolve mortgage challenges.
For authoritative information about mortgage fraud and prevention, visit the FBI’s Mortgage Fraud resource.
