House flipping shows have popularized investing in distressed real estate to turn a profit. This has been very profitable for investors who can secure the proper funding and properties to fix and flip. The popularity of house flipping has caused HUD to develop an FHA flipping rule for people considering financing a property with an FHA loan. Let’s look at how this rule works and its impact on buyers and sellers.
- The FHA flip rule sets a restriction on the financing of a property with an FHA loan if the home was sold within the last 90 days
- There is an additional 180 flipping rule that applies if the purchase price of the property is 100% higher than the original purchase price paid for by the seller
House Flipping and FHA Rules
Under FHA guidelines, flipping is defined as the purchase and resale of property in a short period of time. The process of flipping a home may or may not include rehab of the home to increase the value.
The FHA flip rule puts restrictions on the financing of a property with FHA insurance if the home was sold within the last 90 days. However, certain exceptions that permit FHA financing within 90 days.
If a buyer chooses to use FHA financing they have to abide by the rule set by the FHA. The two main rules are the 90-day FHA flip rule and the 180-day flip rule depending on the transaction. For some investors, the FHA flip rule may be too restrictive depending on their time horizon and investment criteria. Therefore, they may not accept offers on the property if the buyer is planning to get an FHA loan.
What is the 90 Day FHA Flip Rule?
With the FHA 90-day flip rule, the FHA doesn’t permit lenders from approving loans for a property that the seller has owned for less than 90 days. The 90-day rule flip sets a time restriction for lenders for which they must require FHA appraisals to confirm that property was not sold in the last 90 days. This requires the appraiser to certify ownership of the property for the past 3 years.
If it’s discovered that the property was sold in less than 90 days, FHA lenders will decline the mortgage approval for the corresponding buyer. FHA loans tend to be denied more in underwriting than conventional loans and this is a rule that does not exist with conventional loans.
Lenders determine the 90-day timeline stipulation by looking at the date the deed was officially recorded with the county. So if you’re a buyer going through FHA financing, you will have to wait 91 days before you can sign for the property. Once this period has passed, FHA lenders will typically permit financing.
What is the 180 Day FHA Flip Rule?
In addition to the 90-day flip rule, there is also a 180-day flip rule. This flip rule is for properties that are resold and owned between 91-180 days which can make financing slightly complicated. There are additional requirements under this rule. If the resale of the property occurs under the following conditions:
- Between 91- 180 days
- The purchase price of the property is 100% higher than what the seller originally paid for the home
If the purchase falls under these two rules, the lender will require a second appraisal before the loan can get approved. The second appraisal is subject to the following rules.
- The second appraisal must be completed by a new appraiser
- The lender must obtain a 12-month chain of title and document past resale dates
- The new appraiser is not paid for by the buyer
- If the new appraised value from the second appraisal is 5% higher than the first, a lower appraised value will be used
- The lender will require documentation to support increased property value over the first appraisal
Important Note: If the purchase price of the property is 100% higher, it typically indicates that the original buyer purchased the home at a significant discount and completed a full renovation.
These rules are specific to buyers who plan on using FHA financing. Since FHA loans tend to be reserved for first-time homebuyers, the rules are in place as safeguards to prevent buyers from overpaying for properties. When it comes to house flippers, they tend to price homes much higher to improve their profit margins.
FHA Flipping Rule Example
Let’s assume the following activity has taken place with a property that a current buyer intends to sell in the future.
- A seller purchases a property on February 1st for $300,000
- The seller remodels the home in the first 60 days and lists it for sale on the MLS
- A potential FHA buyer tries to sign a purchase contract for April 2nd with the seller
In this situation, the lender would not approve the loan because it falls under 90 days. If the purchase date is after May 1st, the lender will permit this transaction.
FHA Flipping Rule Exceptions
On a positive note, there are qualifying exceptions to FHA flipping rules which are not subject to the 90-day or 180-day clause. They include:
- New construction homes
- Properties sold by non-profit organizations
- Inherited properties
- Properties purchased to relocate employees
- Properties resold by HUD or other government agencies
- Homes located in declared disaster areas permitted by HUD
If the home falls under any of these exceptions the flipping rules do not apply and buyers will qualify for FHA funding.
FHA Loans for Rehab
If you happen to be an investor there are FHA funding options that may help you finance an investment property. There are FHA loans such as an FHA 203(k) Rehab loan and an FHA 203(b) loan that can help you qualify for financing depending on the scope of your investment or required rehab.
It’s worth mentioning that these loans aren’t reserved strictly for investors. They are also in place for borrowers who want to purchase a discounted property that needs work with the intent of making it their primary residence. These programs are in place to help disadvantaged buyers qualify for a home and build some sweat equity.
If you’re a first time homebuyer planning to finance your home with an FHA loan, the FHA flipping rules may prevent you from purchasing certain properties. It’s recommended that you speak with your real estate agent ahead of time to ensure they’re showing your properties that find your lending criteria.
Does the 90-Day Flip Rule Apply For Conventional Loans?
The rule for conventional loans limits homes to be sold up to 120% of the original purchase price within the first 90 day. It essentially caps the profit to 20%. Following the 90 days, you can sell the property for any price you want.