What You Need To Know About FHA Flipping
When you ignore a relatively unknown FHA flipping rule, you could be stopping a purchase where it stands. Property flipping is when an investor buys a house, makes some improvements and then sells it for a profit. If you have watched any HGTV, you will see that people can easily make a living from this.
However, there is a dark side to property flipping when looked at from the side of mortgage loans. This is particularly true with FHA. If you are a buyer, your lender and realtor should understand FHA flipping rules and guidelines. You should also know about this to ensure that you are on the safe side.
Explaining FHA Flipping Rules
A property flip is defined by mortgage lenders as a home that has been owned for a short period of time and then sold for a sizeable profit. FHA and other lending agents care about this because of the possible fraud which is linked to it. Of course, it is important to remember that this is a possible fraud.
Most of the property flips will be completely legitimate. However, when a property has a significant increase in value with almost nothing being done to it, everything becomes a bit suspicious. There are also many flipping schemes which include key parties in the mortgage, appraising and other industries which use false information to endure that purchases work.
Most of the concerns relate to the value of the property or straw buyers. A straw buyer is one who buys with no intention of living in the property. They will often buy the property at an inflated cost to create a profit for the seller. These are some of the reasons why FHA has created flipping rules.
HUD has broken the FHA flipping rules into 2 time periods. These are ownership of fewer than 90 days and ownership between 91 and 180 days.
To determine the time period of ownership, the clock will start on the deed recording date which is the sate when the seller stakes ownership. The next important date will be the date on the signed purchase agreement along with the date of FHA case file assignment. To clear the initial flip date requirement, the signed contract date and the case file ID will need to be assigned 91 days after the deed recording date. In order to clear the second flip rule period, the purchase agreement date and the FHA case number will need to be assigned 180 days later.
FHA 90 Day Flip Rule
The most restrictive of the established date ranges is the less than 90-day one. In these situations, FHA will not allow any financing of homes which are flipped in less than 90 days after the deed recording date. When there is no FHA insurance, a loan will be impossible. Of course, there are some sellers and transactions which are excluded from this rule and you need to be aware of this.
FHA 91-180 Days Flip Rule
If the property has already cleared the 90-day rule, it could still fall into the next rule time period. During this second time period, the sale of a property for FHA financing is allowed. However, there is a possible second appraisal requirement that may have to be met. The FHA will also not allow the buyer to pay for this.
The second appraisal will be required when certain conditions occur. This will be when the sale price is 100% or more than the price paid by the seller. If a higher priced loan is required and the purchase price is 20% more than the seller’s purchase price, a second appraisal is required.
An example of this will be a house which was purchased for $100,000. If this house is then sold for $200,000, a second appraisal is needed. The mortgage lender will determine the last requirement.
Preventing Appraisal Delays And Additional Costs
The Second Appraisal
In regards to the second appraisal, there are some FHA rules to know about:
- This will need to be done by a different appraiser
- Documentation must be included that support the increased value
- The buyer cannot pay for this
- A lower value will be used if the second appraisal is 5% lower than the original one
- The lender must have a 12-month chain of title documenting resales
The FHA may require additional documentation including a second appraisal if the sale occurs between 91 and 365 days after purchase. This will also occur when the resale price is 5% or more than the lowest sale price of the property within the last 12 months. This is very rare, but it can happen.
FHA Flipping Rule Exceptions
It is important to note that there is a possibility of skipping these guidelines. There are certain transactions which are excluded from the FHA flip rules that you need to know about:
- The property has been acquired by a relocation agency or employer in connection with the relocation of an employee
- A resale by HUD under the real estate owned program
- A sale by other government agencies of single-family properties via programs which are run by the agencies
- The sale of property by a nonprofit which is approved to buy HUD-owned properties at a discount with resale restrictions
- The sale of a property acquired through an inheritance
- The sale of a property by a federally or state-chartered financial institute
- The sale of a property by a state or local government agency
- The sale of a property in a declared major disaster area upon issuance of a notice of exception from HUD
These restrictions will not apply to a builder selling any newly built properties or when buying a house for a borrower who is planning to use FHA-insured funding. All of these exceptions can be found in the FHA flipping regulations.
Other Loan Options For Flipped Properties
It is important to note that these rules only apply to FHA loans. A buyer who qualifies for other loan products could get financing even in these cases. There are a number of other loan types that can be considered such as:
- Conventional loans to 97%
- VA home loans
- Renovation loans other than the FHA 203k
- USDA rural development guaranteed loans
These other loan options will not have the same flipping rules, but they will generally pay closer attention to the transaction if a short ownership period is in play. Underwriters will verify the length of the transactions. They will also review the appraisal thoroughly to ensure that the home actually matches the value.
Documentation Related To FHA Flipping
You might be wondering if a buyer can start the process of qualification while not being under contract. The answer is we, but if you want the purchase a flipped home, the date of the contract can cause flipping restrictions. To start the review process, the following documents should be prepared:
- Buyer pre-approval
- A copy of the recorded deed
- A list of the improvements made to the property
- An executed purchase agreement