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If you’re buying a flipped property and are planning to use a loan backed by the Federal Housing Administration (FHA), you need to be aware of the FHA flip rule, also known as the 90-day FHA flip rule. It could cause delays or even prevent you from buying the property.
The main thing to know is you can’t use an FHA loan for properties that have been owned for less than 90 days by the seller. This is to prevent fraud and to protect you and the lender.
This article explains everything you need to know about the rule, including:
• What is property flipping and what to watch out for
• Why there’s an FHA flipping rule
• How timing of the purchase contract affects FHA financing
• What exemptions there are
• How to comply with FHA guidelines on flips
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Questions? Call (844)-763-4466.
Key Points
• Property flipping is where an investor buys a property with the intention of quickly selling it for a profit.
• The FHA implemented a 90-day flip rule in 2003 to protect buyers from being taken advantage of by illegal flipping activity.
• The FHA 90-day flip rule means you can’t finance property with an FHA loan if it was bought by the seller less than 90 days ago.
• You may require a second, independent appraisal if the property is sold between 91 and 180 days of the settlement date.
• If you want to buy a house that’s been owned less than 90 days, alternatives to an FHA loan include conventional loans, VA loans, and seller financing.
What Is Property Flipping?
Property flipping is when an investor acquires a property with the intent of quickly selling it for a profit. The investor can renovate, landscape, develop raw land, or complete other projects to improve the property and then put it right back onto the market. It’s also common to generate profit through rapid property appreciation in hot real estate markets.
None of the above activities is prohibited. But when a property is sold for a large profit soon after being acquired, it could potentially signal illegal activity. Illegal property flipping is where the investor sells the property at an artificially inflated price, usually through collusion with the appraiser. Overvalued properties can be a problem for legitimate buyers as well as mortgage lenders. The FHA created the flip rule to protect borrowers who take out FHA loans.
Recommended: FHA Loan Calculator
Reasons for FHA Flipping Rules
When the FHA created their flip rules, it stated that most flipping occurs within days of the original purchase with little improvement taking place. The purpose of the rules is to prevent the FHA from taking on loans at inflated values and, therefore, protect buyers from being taken advantage of. Our FHA loan buyers guide details other important rules surrounding FHA loans.
FHA Flipping Rules Explained
The FHA flip rules are primarily concerned with the amount of time the property has been owned prior to being resold. It was implemented in 2003 by the FHA to try and prevent the kind of illegal flipping mentioned previously. Lenders rely on information provided by an appraiser to follow the rule. Here’s the nitty gritty:
90-Day Flipping Rule
Under the FHA 90-day flip rule, you can’t finance property with an FHA loan if it was bought by the seller less than 90 days ago. Other requirements include:
• The property must be sold by the owner of record
• The lender must obtain documentation verifying the seller as such
• The purchase can’t involve any sale or assignment of the sales contract
The FHA counts 90 days from the seller’s day of settlement to the day the next contract is signed. There are some additional requirements for purchasing a flipped property from 91 to 180 days after the seller’s day of settlement.
How the FHA Flip Rules Work from 91 to 180 Days
If the property is sold between 91 and 180 days from the settlement date, a second, independent appraisal may be required to verify the value. The second appraisal is required if the value is 100% or more above the price the seller paid. For example, if the home was purchased by the current owner for $100,000 and the new value is $200,000 or more, a second appraisal would be required. The seller cannot require the buyer to pay for the second appraisal.
Exceptions to the 90-Day Rule
There are a few exceptions to the 90-day rule. A property may be eligible for an exemption from the FHA flip rule if it was acquired for its owner by an employer or a relocation agency or if it is:
• A U.S. Department of Housing and Urban Development Real Estate Owned sale
• A local, state, or federal government agency sale
• A Fannie Mae or Freddie Mac sale
• An inherited property
• A property in a presidentially declared disaster area
• An initial builder sale
Property Eligibility Requirements
There are no property requirements with the FHA flip rule. It applies equally to all properties with the exception of those noted above. The only factor the FHA is concerned with when it comes to this rule is how long the seller has owned the property for. If it’s less than 90 days, you can’t finance it with an FHA loan. If it’s between 91 and 180 days and the amount is 100% or more above what the property previously sold for, two appraisals may be required.
Recommended: Minimum Down Payment for FHA Loan
Complying With FHA Flipping Guidelines
It’s easy to comply with FHA flipping guidelines. Your lender can’t give you an FHA loan if the property has been owned less than 90 days.
The FHA appraiser is responsible for properly documenting the date and amount of prior transactions in the appraisal report. The lender submits this information to the FHA when making your application.
Documenting Property Acquisition
The lender must document the date of acquisition for the seller and verify that the seller is the owner of record. Verification may include the property sales history, a copy of the recorded house deed, a copy of the property tax bill, and a title search.
Appraisal Requirements
Appraisers must include all transactions from the previous three years on their Uniform Residential Appraisal Report to submit to the lender. They must also consider and analyze the comparables used to determine the value of the property being sold.
Consequences of Not Following the FHA Flip Rules
The main consequence of not following the FHA flip rules is that your mortgage application may be denied.
Alternatives to FHA Loans
If you have your eye on a flipped property that has been significantly improved in less than 90 days, there are other roads you can take to acquire it. These include:
• Waiting until the seller has owned the property for 91 days before writing the contract (and getting a second appraisal if necessary).
• Financing with a conventional home loan or applying for a VA loan if you’re eligible.
• Arranging seller financing.
No other loan type has a flip rule like the FHA, so if you’re really intent on buying the property, you can explore other options. Read up on FHA loans vs. a conventional mortgage, and then talk to a lender, ideally one that offers both FHA and conventional loans.
The Takeaway
For the most part, the FHA flip rules are simple to understand and follow. You won’t be able to get an FHA loan on a property that the seller purchased less than 90 days ago. The lender is the one who’s required to follow this rule.
Documentation requirements fall on the appraiser and the lender, so it’s important to start with a lender you trust. Find a lender that can be there for you every step of the way so you can complete your property purchase with confidence.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can put down as little as 3.5%, making an FHA loan a great option for first-time homebuyers.
Another perk: FHA loans are assumable mortgages!
FAQ
What qualifies as a property flip under FHA rules?
The requirements for a flip lie with the timeline rather than the property. Any property can be considered a flip if it’s owned for less than 90 days.
Can FHA borrowers purchase a recently flipped property?
FHA borrowers are allowed to purchase a recently flipped property as long as the owner of record has had the property for at least 90 days. Additional appraisal is needed if the property is purchased between 91 and 180 days after the current owner’s purchase and costs 100% or more over the current owner’s purchase price. After 180 days, extra appraisal is asked for at the FHA’s discretion.
How is the 90-day flipping period calculated?
The FHA counts the time between the settlement date of the current owner and the day the new purchase contract is executed. If that time period is less than 90 days, you won’t be able to use an FHA loan to finance the property.
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