March 20, 2018
What do you need to know about property flipping and FHA home loan rules? The first thing to know is that flipping is addressed in the FHA loan handbook, HUD 4000.1 and there are measures in place to discourage the practice.
That said, the rules which prevent flipping usually apply to the buyer’s side of the transaction. FHA loan rules don’t forbid a borrower from selling the home purchased with an FHA mortgage at any time. But the rules do have something to say about FHA mortgage approval for “flipped” homes.
How FHA Defines Flipping
Not all homes that are purchased and end up back in the housing market fairly quickly will meet the FHA definition of a flipped house. HUD 4000.1 defines flipping on page 145, stating:
“Property Flipping is indicative of a practice whereby recently acquired Property is resold for a considerable profit with an artificially inflated value.”
How Soon Does A House Have To Return To Market To Be Considered A Flipped Home?
Generally, 90 days or less. We’ll get back to that time restriction in a moment, but first…
“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.”
That is from HUD 4000.1 with regard to property restrictions for FHA mortgages potentially involving a flipped house. Furthermore:
“FHA defines the seller’s 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.”
We list these two passages from the rule book because there are some who are confused by these rules. When would the 90 days start? A literal read of the above rules would make it seem that the actual calendar date the seller gets legal title to the property is also the moment the clock begins ticking on the 90s.
State law and lender standards may have something to say about that so it is best to consult with the lender to learn what may apply in your transaction.
FHA Loan Rules: The Anti-Flipping Measures
FHA mortgage loan rules include a section which addresses flipping. To begin, the seller of the property must be the owner of record, and there are time restrictions on the acquisition of a new home and when it goes on the market.
To be clear, these time restrictions apply specifically in cases where an FHA loan applicant wants to buy a property-not when a home owner decides to sell. An FHA borrower will not be approved for an FHA loan in cases where the seller’s acquisition date and the date the property goes on sale add up to less than 90 days.
In cases where the property goes back on the market between 91 days and 180 days, the seller is legally allowed to sell to an FHA borrower, but a second appraisal may be required.