FHA loans are often a great option for first-time homebuyers because they allow for lower down payment and more flexible credit score requirements than conventional loans. For many, it’s FHA loans that make dreams of owning a home a reality. However, being government-backed loans, they have other rules and restrictions, that other loan types may not have, such as only allowing for certain property types to be financed and condition requirements the property must meet to protect the homeowner. It is important for homebuyers who plan to use an FHA loan, as well as the real estate agents representing them, to have a good understanding of the specific rules and requirements that come along with FHA loans when house hunting. This knowledge can help you identify potential hang ups early in the process, which provides a greater opportunity to overcome them. It can also help you avoid getting far into the process on a home that may not be eligible for FHA financing. Below, we will look at one FHA rule that is often overlooked when submitting an offer on a home, the FHA Flip Rule.
Property flipping
Property flipping is the practice of purchasing undervalued or distressed properties with the intention of quickly renovating or improving them and reselling them at a higher price. There is nothing inherently wrong with this practice; most homeowners hope to improve the value of their home. Flipping, however, occurs on a much shorter timeline. To be profitable, flippers must carefully analyze market conditions, accurately assess renovation costs, and navigate potential challenges to ensure a successful outcome. Property flipping became popular during the early 2000s housing boom due to the favorable market conditions. Inventory was high and interest rates were low. The birth of property flipping TV shows had everyone wanting to get in on the action. However, with this rise in popularity, there was also an increase in flippers who prioritized profits over the quality of their renovations; often cutting corners and ignoring building codes. Some individuals even engaged in fraudulent activities, such as artificially inflating property values or misrepresenting property conditions. As a result, some homebuyers of flipped homes discovered that their homes needed major repairs or were not worth the price they paid. In 2003, the Federal Housing Administration implemented the FHA Flip Rule to protect homebuyers using FHA loans from such situations. The rule aimed to mitigate risks and safeguard borrowers and the integrity of the FHA loan program. It was designed to ensure that properties financed through FHA-insured loans were not subject to predatory flipping practices, which could lead to inflated prices and potential financial hardship for borrowers.
The FHA flip rule explained
The FHA flip rule is broken down into two parts
Part 1 - The 90-day flip rule
The first part of the FHA flip rule is straightforward. It states that the seller must have owned the property for more than 90 days before a new purchase contract can be written for a buyer using an FHA loan. If this time has not passed, the parties must wait until the 91st day to write the contract.
For example, if a seller acquires a property on April 1st, the earliest a contract can be written for FHA financing eligibility is July 1st (91 days).
Part 2 - The 91-180 day flip rule
The second part of the FHA Flip Rule has a little more to it, and it applies when Part 1 is satisfied. It states that if there sale date of the property falls between 91-180 days following the seller's acquisition of the property, AND if the property is being sold for 100% or more over the price paid by the seller to acquire it, then a second appraisal of the home is required. Furthermore, if the second appraisal supports a value that is more than 5% lower than the original appraisal, the lower value must be used as the property value for the loan.
Let's return to our example from Part 1, but with a few additional details. Suppose the seller purchased the property for $100,000 on April 1st and made major renovations before listing the home for sale at $205,000. As stated before, the earliest date that a contract for a buyer using an FHA loan could be written would be July 1st. Part 2 of the FHA flip rule requires that any contract for an FHA buyer dated between July 1st-September 28th (91-180 days from the seller's original purchase of the property), would require the lender to obtain two separate appraisals. This is because the $205,000 price is 100% or more above what the seller acquired the property for ($100,000). If the second appraisal comes back with a value that is 5%or more below the first, the lower value must be used for the loan.
Exceptions to the flip rule
There are a few scenarios that allow for the 90-day waiting period to be waived. The most common exceptions are:
- If the seller acquired the property through inheritance.
- New construction homes, in which the prior sale was the builder’s purchase of the lot the home was being built on.
- Sales by HUD or other federal, state, or local government agencies.
- Sales by Government-sponsored enterprises (GSEs) or HUD-approved non-profits.
- Sales within presidentially declared major disaster areas.
You can read the full letter from HUD explaining the FHA Flip rule on the HUD website.
A trusted resource
If you are planning to purchase a home with an FHA loan, it is important to be aware of the FHA flip rule. Always make sure to check to see when the seller acquired the home. Conventional and VA loans do not have a similar rule, which often causes agents to forget to check the prior sale of a property when writing the purchase contract. When this oversight is eventually discovered, it is usually by the appraiser, late in the sale process. Late discovery can lead to unanticipated closing delays, or worse, the deal falling apart entirely.
The FHA flip rule has its critics. Some argue that it stifles the housing market by making it more difficult to sell homes. However, the FHA implemented the rule to safeguard borrowers and maintain the stability of the FHA loan program. By establishing guidelines and restrictions on property flipping, the FHA aims to protect consumers, ensure fair lending practices, and maintain the integrity of the real estate market.
At CapCenter, we specialize in helping homebuyers navigate the home buying process and are here to serve as a trusted resource for our clients. If you have any questions on FHA, the flip rule, or any other aspect of the home buying process, do not hesitate to reach out to our team. We are here to provide guidance and support, making your journey to homeownership as seamless as possible. Contact us today to get started!
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