FHA suspends anti-flipping provisions

November 07th, 2011

Many investors (including contractors) have used the process of property flipping to earn profits. Flipping entails purchasing a home (often a worn-down home, and often with cash), remodeling it quickly, then re-selling it as fast as possible at a profit. The investors then move on to another property with the original funds.

Historically, the Federal Housing Administration (FHA) forbade loans on properties owned by the seller for less than 90 days (i.e., sold in a property flip). However, effective February 1, 2010, the FHA temporarily suspended that rule in an effort to quicken the pace of housing recovery. This was then extended through 2011 and may be extended again in 2012.

For buyers

This temporary FHA rule suspension makes it easier for prospective home buyers to purchase rehabilitated properties by allowing FHA loans on them. FHA loans frequently have lower down payment requirements and somewhat looser lending standards than conventional loans. Because of this, FHA loans are frequently used by first-time home buyers--thus also expanding the net of eligible home buyers to aid in the housing recovery.

If you are purchasing a flipped property within 90-days of the prior sale, there are some conditions from FHA you will need to be aware of:

  1. Any sale within 90 days of the prior sale must be an arm's length transaction (i.e. the buyer cannot be related to the seller).
  2. If your purchase price exceeds the seller's purchase price by more than 20%, you may need:
    • Two appraisals of the property to verify value
    • Verification that the seller "substantially" rehabilitated the property
    • A physical inspection by an inspector of the lender's choice
    • More thorough scrutiny of the property appraisal

If you are taking advantage of FHA financing, this FHA rule suspension is to your benefit. Before entering a purchase contract, just make sure your agent and lender do their homework to find out the seller's purchase price and what additional conditions may apply to ensure that your transaction proceeds as smoothly as possible.

For the housing market

The FHA rule suspension conditions are intended to prevent fraud. However, by making FHA loans available to purchasers of flipped properties, the FHA rule suspension will make it easier and quicker for investors to sell their flipped properties at a profit.

While low home loan rates have benefited housing markets, they've been harmed by the amount of inventory on the market. This guideline change by HUD should allow more funds to flow into local markets to take distressed properties off the market and convert them into livable homes. Through market forces, properties that are blighted can be transformed into model homes--helping the prices and aesthetics of neighborhoods across the country.

Posted By :

Dennis is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped thousands families purchase homes. His Weekly Rate and Market Update keeps his clients and real estate professionals educated and informed on the mortgage industry and the economy. from Pitzer College and is married with two children.

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