Last month, the Department of Housing and Urban Development (HUD) issued new rules for FHA loans and house flipping. The new guidelines are part of the agency’s brand-new Single Family Housing Policy Handbook, which will take effect in June 2015.
In most cases, borrowers cannot use FHA loans to purchase a home that is being “flipped.” But there are a few exceptions to this general rule. Here’s the latest on HUD’s flipping guidelines for 2015.
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.”
That’s basically a textbook definition of flipping. But HUD seems to have an even darker view of this practice. They go on to state that flipped properties are often “resold for a considerable profit with an artificially inflated value, often abetted by a Mortgagee’s [i.e., lender’s] collusion with an Appraiser.”
Notice their choice of words here. Abetted. Collusion. These words are typically used to describe some kind of criminal act or enterprise. So now we know how HUD feels about property flipping! This mindset helps explain some of the restrictions they have for FHA loans and flipping, and why they want to keep their borrowers away from flipped properties.
Without further introduction, here are their 2015 guidelines for would-be flippers:
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 newly released 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.
Learn more: The specific guidelines included in this story were adapted from the policy handbook mentioned earlier. If you would like to learn more about the rules and requirements for FHA-insured mortgage loans and flipped homes, refer to Handbook 4000.1, the “Single Family Housing Policy Handbook.” This reference can be found on the official HUD website located at HUD.gov. It is available in PDF format for easy download.