Out with the old and in with the new! There’s no doubt that home buyers love a good house flip and a flexible loan program (FHA) that can help them finance it.
However, if you plan to finance a flipped home with an FHA loan, it’s essential that you know about the FHA Flipping Rule.
The FHA flipping rule works by restricting FHA financing on a home if it has been sold within the past 90 days.
The FHA flip guidelines can be broken down into two time periods:
- Less than 90-day ownership
- 91-180-day ownership
The rules are slightly different for each of these.
The FHA 90-Day Flip Rule
With this rule, the FHA lender must hire an FHA appraiser to look at the history of the home’s ownership. If the last recorded ownership deed is less than 90 days away from the new purchase date, the lender will decline the loan.
The FHA 91-180-Day Flip Rule
If the seller bought the home within the last 91 to 180 days, further investigation is necessary. If the lender finds that the below apply, a second appraisal is needed.
- The resale is between 91 – 180 days
- The new purchase price is 100% or more over the price paid by the seller
- A higher-priced loan (HPML) and the purchase price is more than 20% over the seller’s acquisition price
The FHA has rules on how a second appraisal can take place:
- It must be from a different appraiser
- The buyer may not pay for the second appraisal
- It must include documentation to support increased value
- A lower value is used if the second appraisal is 5% lower than the first appraisal
- The lender must obtain a 12-month chain of title documenting resales
How Does the Rule Impact FHA Borrowers?
This FHA rule means that any borrowers wishing to purchase a home that has only recently been sold will struggle to get financing. If it has been less than 90 days since the seller originally bought the property, you may not be able to get an FHA loan at all. That doesn’t mean you can’t buy the property, but you will likely have to find another type of mortgage.
Are There Any Exceptions to the Rule?
There are some exceptions to the FHA flipping rule because the FHA understands that not all property flips are fraudulent. The exceptions are:
- Properties acquired by an employer or relocation agency in connection with the relocation of an employee;
- Resales by HUD under its real estate owned (REO) program;
- Sales by other U.S. government agencies of Single-Family Properties pursuant to programs operated by these agencies;
- Sales of properties by nonprofits approved to purchase HUD-owned Single-Family properties at a discount with resale restrictions;
- Sales of properties acquired by the seller by inheritance;
- Sales of properties by state and federally-chartered financial institutions and Government-Sponsored Enterprises (GSE);
- Sales of properties by local and state government agencies; and
- Sales of properties within Presidentially Declared Major Disaster Areas (PDMDA), only upon issuance of a notice of an exception from HUD.
- The restrictions listed above and those in 24 CFR 203.37a do not apply to a builder selling a newly built house or building a house for a borrower planning to use FHA-insured financing.
Are There Other Financing Options for a Flipped Property?
The FHA flipping rule may rule out some properties from your search, but FHA loans aren’t your only option. You may still qualify for financing in the form of conventional loans, VA loans, or USDA loans.
However, bear in mind that while other loan types don’t have the same flipping rules, some lenders will still pay attention to short ownerships.
Underwriters will look into the purchase closely to check there’s no deal being made between the buyer and seller. They will also want to check that the value of the home is fair and accurate.
The FHA flipping rule may be slightly inconvenient but it does help to reduce fraud so that the FHA can help those who truly need it. If you are unable to get an FHA loan, it’s definitely worth looking into your other options. Many conventional lenders will still consider applications with lower credit history so it pays to shop around.