FHA Flipping Rules Explained
There are two main categories of real estate investors. The first is a long term hold strategy. Secondly, there is flip which is a short term sell for profit strategy. A property flip is when investors purchase a home, renovate it, and then sell it for a profit. Both investments are wealth building strategies using real estate as the catalyst. But when it comes to mortgages, lenders have restrictions and rules for property flips. These rules can potentially restrict a seller’s ability to sell quickly. These restrictions are called FHA flipping rules.
So, property flips sound like a great thing and you would be correct. But, the purpose of this article is to share the rules and potential restrictions of property flips.
Mortgage lenders define property flips as a home that has been held a short time and then sold for considerable profit. First of all, this is not illegal if everything is done above board. Though, FHA does have special requirements for homes which are considered a flip.
FHA Flipping Rules Requirements < 90 Day Ownership
FHA flipping rules are at least very specific and easy to follow when you know the rules. First, the seller must be the owner of record and the sale may not involve an assignment of contract. Basically the person or entity on the deed must be the seller. Next, lenders must obtain and submit documentation proving the owner of record to FHA / HUD. Then, appraisers are required to provide prior sales of the subject over the previous 3 years. The most restrictive rule is the 90 day FHA flipping rule. FHA will not allow a buyer to purchase a home owned by the seller for less than 90 days. Therefore the purchase contract date must be 91 days after the recorded deed date. Otherwise if less than 90 days, FHA will not insure the loan. Therefore, lenders cannot close an FHA loan.
FHA Flipping Rules Between 91 and 180 Days
Again, FHA calculates days starting with the deed recording date through purchase contract signature date. We now understand FHA requires a 90 day waiting period. Properties owned between 91 and 180 days have other rules. So IF…
- The resale is between 91 and 180 days AND
- Purchase price is 100% or more over the price paid by the seller
A second appraisal is required. FHA will not allow the buyer to pay for the second appraisal. Here is a second appraisal example. For example, an investor purchased a property for $50,000 and sells it for $100,000. The reason is the new sales price is 100% over the initial purchase price. FHA does reserve the right to require additional documentation like a second appraisal IF
- Sale date is between 91 and 365 days AND
- Resale price is 5% or greater than the lowest sale price of the property within preceding 12 months
Exceptions to FHA Flipping Rules
Not all recently acquired homes are considered flips. So the follow sales are exceptions to the flip rules:
- Properties acquired by an employer or Relo company
- Re-sales by HUD under its REO program
- U.S. government agencies sale of single family properties pursuant to programs operated by these agencies
- Nonprofits approved to purchase HUD owned single family properties at a discount with resale restrictions
- Properties acquired by the seller through inheritance
- State and federally – chartered financial institutions and government sponsored entities
- Local and state government agencies
- Presidentially Declared Disaster Area properties
If an investor buys a property using these exceptions, the future sell must meet the FHA flip requirements discussed.
Other Mortgage Options Without Flip Requirements
So now you know FHA rules, but what about other loan types? No money down options include USDA and VA loans. Furthermore, Fannie Mae and Freddie Mac conventional loans offer as low as 3% down payment financing. None of these mortgage loans have restrictions in regards to flipping timeframe. Although lenders will review a flipping type purchase to ensure it is a true arms length transaction.
Occasionally some investors and realtors will ask about the old FHA flip waiver rule. But the FHA waiver expired on 12/31/2014 though.