What constitutes flipping? It is a housing market practice generally discouraged by FHA loan rules found in HUD 4000.1, but what is flipping in the eyes of the FHA and HUD? According to the FHA loan handbook:
“Property Flipping refers to the purchase and subsequent resale of a Property in a short period of time.” Also found in the FHA loan handbook, this further explanation of what the FHA considers to be property flipping:
“Property Flipping is indicative of a practice whereby recently acquired Property is resold for a considerable profit with an artificially inflated value.”
What is the basic FHA loan guideline for a transaction that could be identified as flipping? Situations where the home has been owned for 90 days or less. Some FHA loan rules in this area may apply as long as 180 days after acquisition depending on circumstances.
Why does this matter? FHA loan rules do not allow loan approval in circumstances where the seller offers a home to an FHA borrower if the owner has had it for 90 days or less, according to HUD 4000.1, pages 140-142, which includes the following instructions to the lender:
“The eligibility of a Property for a Mortgage insured by FHA is determined by the time that has elapsed between the date the seller has acquired title to the Property and the date of execution of the sales contract that will result in the FHA-insured Mortgage. FHA defines the sellers date of acquisition as the date the seller acquired legal ownership of that Property. FHA defines the resale date as the date of execution of the sales contract by all parties intending to finance the Property with an FHA-insured Mortgage.”
“A Property that is being resold 90 Days or fewer following the sellers date of acquisition is not eligible for an FHA-insured Mortgage.” There are some notable exceptions; REO properties may be exempt from the 90 day rule. So are properties inherited by the owner. There are some other exceptions including certain sales by state agencies and non-profit groups.
For all other circumstances, after 90 days, FHA loan rules state that certain appraisal rules apply:
“A Mortgagee must obtain a second appraisal by another Appraiser if…the resale date of a Property is between 91 and 180 Days following the acquisition of the Property by the seller; and the resale price is 100 percent or more over the price paid by the seller to acquire the Property. If the second appraisal supports a value of the Property that is more than 5 percent lower than the value of the first appraisal, the lower value must be used as the Property Value in determining the Adjusted Value.”
FHA loan rules also require the lender to obtain a “12 month chain of title documenting compliance with time restrictions on resales”. If you are not certain how these FHA loan rules may affect your transaction, speak to a loan officer to determine what may or may not apply.