Ignoring a little known FHA flipping rule can stop a purchase in its tracks. A property flip involves an investor purchasing a home, probably making improvements, and then selling for a profit. If you watch HGTV at all, it is easy to see that people make a great living doing this. Plus, they deliver amazing work, but there is a dark side to property flips in the eyes of mortgage loans. This is especially true with FHA. If you’re a buyer, hopefully, your lender and Realtor® understand the FHA flipping rule guidelines. Luckily, OVM Financial fully understands the guidelines, so let’s discuss the ins and outs.
FHA Flipping Rule Explained
Mortgage lenders define a property flip as a home that has been owned a short period and then sold for a sizable profit. The reason FHA and lending agents care about this relates to possible fraud. Keep in mind this says “possible.” Most property flips are legitimate. When properties increase dramatically in price and value with practically nothing being done, that’s where it can get dicey. Furthermore, many flipping schemes include key parties in the mortgage business, appraisers, and other industry professionals that use false information to make the purchase work. Most concerns involve either the value or straw buyers. Straw buyers are buyers who are buying with no intention of living in the property and often buy at an inflated price to profit the seller.
Now you know why FHA created this rule. HUD breaks down the FHA flipping rule into two time periods:
- Less than 90-day ownership
- 91 – 180-day ownership
FHA Flip Rule 2018 Calculations
To determine the above ownership time periods, the clock starts with the deed recording date (the date in which the seller takes ownership.) The next important date is the signed purchase agreement date and FHA case file assignment date. In order to clear the first flip date requirement, both the signed contract date and the FHA case file ID must be assigned 91 days after the seller’s deed recording date. Finally, to clear the second rules period (90 – 180 days), both the purchase agreement date and FHA case number must be 181 days later. But, how does FHA treat purchases within these date ranges? That is where Realtors®, buyers, and sellers need to pay attention to avoid costly mistakes!
FHA 90 Day Flip Rule
Now that we have established the two date ranges. Let’s discuss the most restrictive “less than 90-day flip rule.” FHA WILL NOT ALLOW financing of homes considered a flip less than 90 days from the deed recordation date. Without FHA insurance, the loan is not possible. Now, there are certain transactions and sellers that are excluded from this 90-day rule. These are explained later in this article.
Occasionally Realtors® or investors ask about the FHA flip waiver rule. Regretfully, this FHA waiver expired 12/31/2014.
FHA Flipping Rule 91 – 180 Days
What if the property has cleared the 90 days, but it falls within the next 91 – 180 day period? This period allows the sale of a property for FHA financing, but there’s a possible second appraisal requirement and FHA will not allow the buyer to pay for it. So, if…
- The resale is between 91 – 180 days AND
- 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
Then, the second appraisal is required. Here is an example of the 100% over the prior price. If the seller paid $100,000 for the home and is selling it for $200,000, the second appraisal would be required. The mortgage lender must determine the last requirement.
FHA Flipping Rule Second Appraisal
Here are the FHA rules in regards to the second appraisal:
- Must be from a different appraiser
- Buyer may not pay for the second appraisal
- 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
Furthermore, FHA could require additional documentation such as a second appraisal if the sale date is between 91 – 365 days and the resale price is 5% or greater than the lowest sale price of the property within prior 12 months. This is rare, but it could happen.
FHA Flipping Rule Exceptions
Finally, it is possible to skip these guidelines. FHA flipping rules exclude certain transactions from FHA flip rule guidelines including:
- 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.
Above exceptions list obtained from FHA’s flipping regulation 24 CFR 203.37.
Other Loan Options for Flipped Properties
Now, keep in mind these rules apply just to FHA loans. Buyers who qualify for other loan products could obtain financing in these cases. Possible loan types include:
- Conventional Fannie Mae or Freddie Mac loans to 97% – Home Possible or HomeReady
- VA home loans
- USDA Rural Development Guaranteed loans – Unbelievable no money down option
- Renovation loans (not FHA 203k) – Want to do more improvements?
Although other loan programs do not have such flipping rules, lenders always pay particular attention to details when a short ownership period is in play. First, underwriters will specifically verify the purchase is a true arm’s length transaction. Meaning, there is no collusion going on between buyer and seller. Furthermore, underwriters review the appraisal thoroughly to make sure the home supports the value.
FHA Flipping Rule Transaction Documentation
Can a buyer start the qualification process without being under contract? Yes, we can do that! Keep in mind, if you decide to purchase a flipped property, it is the date of the contract that causes the above restrictions. We can go ahead with the borrower’s review process while waiting for a property. Here is an FHA flip preparation list:
- Pre-approval needed for the buyer
- A copy of the seller’s recorded deed
- A list of improvements to the property
- Use a date calculator to safely pass the required dates
- A fully executed purchase agreement