FHA Waives 90-Day Flip Rule! (Updated 5/20/10)
In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD and FHA announced a policy change that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. This is great news for both buyers and sellers.
The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales (known as “flips“). This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities. FHA borrowers have often been shut out from buying affordable properties. This action will enable more buyers, and especially first-time buyers, to take advantage of this opportunity.
As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers. But with certain exceptions, FHA has prohibited insuring a mortgage on a home owned by the seller for less than 90 days. Often, and especially in Northern Virginia, these are homes acquired by investors through auctions, bank resales, or “short sales,” that have been upgraded and repaired with the intention of making the investors a profit on the resale.
FHA found that acquiring, rehabilitating and reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of the sellers/investors to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.
The waiver begins February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices where non-rehabilitated properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:
- All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender can document the improvements and repairs justifying the selling price.
Update – May 20, 2010: The 20% rule noted above is being treated liberally, according to my lending sources. Rather than requiring the seller to “document the improvements and repairs justifying the selling price” with receipts, lenders are more simply requiring a second independent appraisal, also allowed under FHA rules.
Other details of this new policy are in the text of the waiver, available on HUD’s website.
This is likely to further increase the use of FHA over conventional mortgages with less than 20% down, because most lenders still have the “flip rule” on their own minimum down-payment programs.
The Real Estate Business
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Buyers, first-time buyer, home purchase, home sellers, homebuyers, mortgage, Sellers
Themocracy
The fact it was only owned for 45 days is not going to be a factor unless it is a ripoff – for instance, the seller is making more than 20% profit (after his documented rehab costs). Who are “they” who are telling you that you can only go conventional? You might wish to consult with another mortgage professional. Even conventional loans can be had that might work well for you.
can you get an FHA mortgage if the seller only owned the house for 45 days when I bought it? My realtor allowed me to put a deposit on this house knowing full well that I was going FHA now they tell me I can only go conventional. I’m 25 yrs. old and was hoping to take advantage of the Obama $8000.00. Can you help?
A legitimate argument. I agree – the language the HUD/FHA used (which I reused) about “predatory” practices can be construed as inflammatory. If you are selling at market price, why would it be “inflated?”
Smacks of a Snidely Whiplash-like characterization of investors who make a profit, as though that is evil.
OK, so you said: “To protect FHA borrowers against predatory practices where non-rehabilitated properties are quickly resold at inflated prices to unsuspecting borrowers…”
I don’t get it. If you get a killer deal on a house that’s already in great shape (no rehab needed), then turn around and resell it quickly for a nice profit, how’s that harming the buyer? Or anyone? What makes this predatory? The amount of profit? Is it somehow OK and not “predatory” if you only make $5,000 on flipping a nice house…but if you make $50,000 because you got it at such a great deal, now it’s suddenly predatory?
Frankly, it’s this kind of careless language thrown around that gives honest real estate investors a bad wrap. No one’s being deceived in a deal like that. Folks just can’t grapple with the fact that you can, in fact, make a KILLING on one house if you’re good at finding killer deals…and that it can be a house that actually needs little-to-no work. It happens. A lot. And it’s not predatory.
Sorry, but that kind of talk just sets me off.
Regarding the FHA waiver, folks should definitely read it for themselves to understand it. I also posted an executive summary on my blog if you’re interested.
Thanks,
…jp