The Department of Housing and Urban Development (HUD) issued new rules for FHA loans and house flipping
The full text of the new guidelines can be found in the new Single Family Housing Policy Handbook, (page 145-146) which defines flipping as buying and selling a home at a significant profit in a short amount of time. In a nutshell, the rule states that buyers who wish to purchase a flipped property can't do so until 90 days have passed between when the seller purchased the property and when they are reselling.
Guidelines for Property Flipping With an FHA Loan
Let’s start with a definition. In the new handbook, HUD defines house flipping as “the purchase and subsequent resale of a property in a short period of time.”
Time Restriction on Title Transfer: 90-Day Rule
In order for a home to be eligible for FHA financing, a certain amount of time must pass between (A) the date on which the seller acquired the title and (B) the sales contract execution date that will result in the FHA-backed mortgage loan. In other words, they will look at the length of time the investor or flipper holds the title, before transferring it to a buyer using an FHA loan.
In this context, the initial date of acquisition is when the investor or flipper acquired legal ownership of that home. That’s the first important date. The second important date occurs when the sales contract is signed and executed by “all parties intending to finance the property with an FHA-insured mortgage.”
The time between these two dates will determine whether or not an FHA loan can be used to purchase the flipped property. And this is where the all-important 90-day rule comes into play.
Generally speaking, a home that is resold 90 days or less after the first date of acquisition is not eligible for FHA mortgage financing.
Second Home Appraisal Required in Some Cases
In some flipping or quick-turnover scenarios, HUD will require a second appraisal on the home. Here again, the length of time between purchase and resale determines the course.
If the resale of a home occurs somewhere between 91 and 180 days after the seller acquired the property (and the resale price is 100% or more above the initial price paid), the lender must obtain a second home appraisal to determine the current market value.
According to the 12/30/16 recised handbook, if the second home appraisal shows a value that’s more than 5% higher than the first appraisal, the lesser of the two values will be used for FHA loan purposes.
Special Circumstances: Exceptions to the ‘No-Flip’ Rule
As with most FHA loan guidelines, there are a few exceptions to these flipping rules. For instance, the time restrictions mentioned above may not apply when:
- The home is being purchased by an employer or relocation agency to relocate an employee.
- The home is being resold by HUD, as part of its REO program for selling foreclosures.
- The home is being sold by a government agency, a HUD-approved nonprofit agency, a state or federally-chartered financial institution, or a Government-Sponsored Enterprises (GSE) like Fannie Mae.
- The home being sold was acquired through an inheritance.
- The property falls within a Presidentially Declared Major Disaster Areas (PDMDA), and has been issued a notice of exception from HUD.
The exceptions listed above aren’t true house-flipping scenarios. They are unique circumstances. That means the 90-day rule for FHA purchases applies to nearly all home flipping situations.
The more troubling and longstanding rule effecting the warrantability of flipped properties comes from Fannie May's regulation of conventional loans. This rule focuses on the seller's profit: if it's more than 20% from sale price to sale price, the 90 day rule is enacted here too.
CONVENTIONAL LOAN 90 DAY DEED RESTRICTION
Here what is important is the deed's recording date--as in when the investor's deed was recorded. This date marks the start of the 90 day count. Within the 90 days, the property can be sold for anything less than 120% of the investor's purchase price, and has nothing to do with repairs or improvements. On day 91 and on, the property can be sold for any amount.
FHA'S 90 DAY FLIP RESTRICTION
The same timing applies here: the 90 day clock starts with the transfer of title/deed record date when they initially purchased the property. From the transfer of title, 90 days must pass in order for a buyer to obtain an FHA loan.
What does all of this mean? Short of finding the illusive cash buyer, investors will be waiting at least 90 days plus ~30 to 45 days for loans. My advice is to list the property when it's ready, and enter into an agreement with a buyer to execute a contract on day 91. This is really the only way to make the math amount to the 91 + 30 to 45, instead of potentially a whole lot more.
What does all of this mean? Short of finding the illusive cash buyer, investors will be waiting at least 90 days plus ~30 to 45 days for loans. My advice is to list the property when it's ready, and enter into an agreement with a buyer to execute a contract on day 91. This is really the only way to make the math amount to the 91 + 30 to 45, instead of potentially a whole lot more.
