The FHA flipping rules help prevent homeowners from using FHA funds to buy and sell homes in a short amount of time. Just how short of a time period is considered too short? According to the FHA, 90 days is too short. However, they also have special rules for any home being sold within 180 days of the original purchase.
What is Flipping?
People that flip houses buy a home and sell it soon afterward, making a profit. The FHA is not in the business of investment homes. They provide a guarantee on loans that are for owner-occupied purposes only. It’s a means to help lower income borrowers or those with less than perfect credit to secure a loan. One of the documents borrowers sign at the closing states that they have the intention to live in the home as their own.
Buyers that buy a house only to sell it a few months down the road usually do so as an investment. They have another home to live in while they fix up the original home. They then put it on the market for a price that is higher than what they paid for the home. The investor pays off the mortgage and pockets the difference.
The 90-Day FHA Flipping Rules
The FHA must know the acquisition date of the property. In other words, when did the seller buy the home? If more than 90 days have not passed, the FHA will not approve the loan. In their eyes, this is house flipping and the FHA does not allow this practice.
The 180-Day FHA Flipping Rules
Even though you make it past the 90-day rule, there are still restrictions on homes that the seller owned for less than 180 days. First, lenders must secure a second appraisal. This helps ensure that the original appraisal was not inflated. If the value were inflated, the FHA would stand to lose a lot of money since they guarantee the loan. Lenders usually enforce this rule when the asking price is 100% more than the original price the seller paid.
The two appraisals should be similar in the values they provide. If the second appraisal shows a value that is more than 5% less than the first appraisal, the lender must use the lower value.
Flipping Rules Longer than 180 Days
Just because an owner owned a home more than 180 days doesn’t mean you are in the clear, though. Lenders must go back as long as 12 months to determine a fair value for a home. If the asking price of the home is more than 5% higher than the original price, the lender must secure a second appraisal.
Any time a lender needs a second appraisal on an FHA loan, the buyer cannot pay for it.
Of course, there are a few exceptions FHA flipping rule. If the home was acquired through a company relocation program or an inheritance, the rules on timing does not apply.
Your best bet is to talk honestly to a lender if you know the home you want to buy was purchased within the last year. The FHA doesn’t allow flipping because it protects you, the buyer. The FHA doesn’t want you to overpay for the home as much as they don’t want to lose money on a loan on a home with a lower value than you pay.
The FHA flipping rules, while strict, are only meant to protect everyone in the transaction. It doesn’t do you any good to buy a home for more than it is really worth. Consider the need for the second appraisal and lack of financing from the FHA a good thing as you can avoid a bad investment.