FHA Flipping Rules 2021

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As a buyer, you may not be concerned with the details of when the home you are interested in was last sold or for how long the seller owned it. However, if you are a borrower pursuing FHA financing, flipped properties present some issues that will need to be taken into consideration before you are able to finance the purchase of your home through an FHA loan.

What You Should Know?

  • The FHA flipping rule was put in place to protect FHA borrowers from purchasing houses that are worth less than their price
  • Under the 90-day flipping rule, a borrower cannot receive FHA financing if the seller has bought the house in the past 90 days
  • Under the 180-day flipping rule, if the seller has owned the house for 91 to 180 days before selling, a second appraisal may be required if the house’s price is 100% or more higher than what the seller purchased it for

What is house flipping?

Real estate investors who engage in house flipping, purchase properties and resell them quickly after at a higher price to make a profit. The investors may or may not make renovations to the house before they sell them. Home improvements are typically done so that the house’s value can increase and the investors can earn a larger profit.

What is the FHA Flipping rule?

The FHA flipping rule restricts FHA-financing to borrowers who intend to purchase flipped properties that the seller has not owned for at least 90 days. This rule is put in place for two main reasons. First, the FHA flipping rule protects FHA borrowers from purchasing houses that are worth less than their sale price. Second, this rule prevents fraudulent flipping practices where parties such as sellers, appraisers, and others collude with one another to increase the value of a house. HUD separates the FHA flipping rule to account for two time periods, the 90-day rule and the 180-day rule.

What is the FHA 90 Day flip rule?

If the seller of a flipped property has owned the house for less than 91 days from the time they bought it, then the buyer of this property will not be able to receive FHA financing. The specific dates that are involved are the date the seller takes ownership of the house, also known as the deed recording date, the signed purchase agreement date, and the FHA case file assignment date. In order to be eligible for an FHA loan, the signed agreement date, and the FHA case file assignment date will need to be at least 91 days after the deed recording date by the seller.

How the process works is that the FHA lender hires an appraiser. The appraiser looks at the history of the ownership of the house and particularly when the last deed was recorded. If the last deed was recorded within the past 90 days, then FHA must decline the loan application.

If you are determined that you want to purchase the property, you can either wait until the 90-day period has passed or you can explore non-FHA financing options with no flipping rules.

90 Day Flip Rule - Example

Ben is an investor who purchased a property on May 1st, 2021 with the intention of selling it quickly. On June 22nd, Claire, an interested buyer, decides she wants to purchase the property. Will Claire be able to receive FHA financing?

Answer: It has been 52 days since Ben purchased the property. Therefore, according to the FHA 90 day flip rule, Claire won’t be able to take out an FHA loan. However, Claire will be able to do so on July 31st, 2021, if other conditions are also met.

What is the FHA 180 Day flip rule?

Besides the 90 day period, there is another FHA flipping period for when houses sold within 91 and 180 days of the last deed recording date. This is called the FHA 180 day rule and it imposes additional requirements, such as a second home appraisal for specific house sales. A second appraisal may be required when the following conditions are met:

  • The seller bought the home within the last 91 and 180 days AND
  • The sale price was 100% or more higher than what the seller bought it for
  • There is a higher-priced loan and the house is sold for 20% more than what the seller bought it for

A second appraisal may also be required in the scenario when the seller has owned the home for 91 days to 365 days before they sell it, and the resale price is 5% higher than the lowest price the house was sold for during the past 12 months.

The good news is that FHA does not allow you, as a borrower, to pay for the second appraisal.

180 Day Flip Rule - Example

Ben bought a home for $100,000 on March 1st, 2021. He then wants to sell it to Claire for $200,000 on July 1st, 2021. Will Claire be eligible for FHA financing? If so, will a second appraisal be required?

Answer: Ben has owned the property for 121 days. This means that this case falls under the 180-day flip rule and Claire is eligible for FHA financing. Since the property is sold to Claire at a price 100% higher than what Ben bought it for, then a second appraisal will probably be required by the FHA lender.

Second Appraisal Conditions

There are some conditions to how the second appraisal should be conducted in order to count for the FHA 180 Day flipping rule. These conditions include:

  • The second appraisal must be conducted by a different appraiser
  • The buyer cannot pay for the cost of the second appraisal
  • The increase in value of the property must be justified through documentation
  • If the value determined by the second appraisal is 5% lower than the first one, then the lower value is used
  • Documentation of the resales of the house during the last 12 months has to be obtained by the lender

Exceptions from the FHA Flipping Rule

The FHA flipping rules do not apply to all house re-sales. There are a number of properties that are exempt from the time restriction under FHA regulations. These include:

  1. Properties acquired by an employer or relocation agency in connection with the relocation of an employee
  2. Re-sales by HUD under its Real Estate Owned (REO) program
  3. Sales by another agency of the United States Government of REO single family properties pursuant to programs operated by these agencies
  4. Sales by nonprofit organizations approved to purchase HUD REO at a discount with resale restrictions
  5. Sales of properties that were acquired by the sellers through inheritance
  6. Sales of properties purchased by an employer or relocation agency in connection with the relocation of an employee
  7. Sales of properties by state and federally-chartered financial institutions and any other Government Sponsored Enterprise (GSE)
  8. Sales of properties by local and state government agencies
  9. Sales of properties located in Presidentially Declared Disaster Areas, but only upon announcement by HUD through the issuance of a Mortgage Letter

Financing options for flipped houses

It is important to note that the flipping rule only applies to FHA loans. Therefore, if you are a borrower who doesn’t want to wait for the 90 day or 180 day period to end, then you can explore different financing options, such as:

Conventional Loans - The Home Possible program by Freddie Mac and the HomeReady program by Fannie Mae provide loans with a down payment as low as 3% for borrowers who fulfill the requirements.

VA loans -You can put a $0 down payment and pay no mortgage insurancewith a VA loan. However, to qualify you need to be a service member or veteran or the spouse of a service member/veteran.

USDA loans - These loans do not require any down payment and are available to lower-income earning individuals living in rural areas.

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