FHA flips and what you need to know

Click here to see the original waiver.

This means that buyers may use FHA financing to purchase a home that was previously purchased by the seller within the past 90 days.  Before this waiver an FHA purchaser was required to wait until the seller had owned the property for at least 90 days.

Summary of the waiver:

All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.  The lender is looking for the following:

Seller holds title to the property

LLC’s, corporations or trusts that are serving as sellers were established in accordance to the law

NO pattern of previous flipping as evidenced by multiple title transfer in the last 12 months (this is a big one to look out for)

Property was marketed open and fair

In cases where the sales price of the property is 20% or more above the seller’s acquisition cost, the waiver will only apply if the lender follows these criteria:

Justify the increase with supporting documentation and/or a second appraisal (2^nd appraisal cannot be paid for by the borrower)

A property inspection must be ordered by the lender and the inspector can’t have an interest in the property or relationship with the seller.  The cost can be passed onto the borrower at closing.

The property inspection will be reviewed by the Mortgage Underwriter and repairs may be requested.  (Underwriter is primarily looking for health and safety issues)

Please note that if the sales price of the property is less than 20% above the seller’s acquisition cost the above does not apply.

It’s absolutely perfect!!  The family loves it, the kids are running around the backyard, your wife can picture her clothes in the master closet, and you see yourself working on your toys in the 3 car garage.  You rush to write an offer on the home because you know, in Phoenix, there are multiple offers on everything in this price range.  It’s so perfect that you’re even willing to pay more than the list price just to secure the home.  The seller accepts your offer, calls your Realtor, and gives them the bad news.  Wait!!! The bad news???  The seller bought this home only 7 days ago, and has now re-listed it for $29,000 more than he paid for it.  The property is what is known as a ”flipped house” in the Phoenix real estate market.  He tells your Realtor that you need to make sure your lender can secure a mortgage on the property, since he just bought it.  No problem, right?

Your lender originally prequalified you for an FHA loan with a low 3.5% down payment.  You call your lender and he tells you, “I’m sorry we can’t do an FHA loan because of the 90-day rule.”  Your confused.  What is the 90-day rule?  You look on the Internet and find that HUD’s 90-day rule states any re-sales occurring 90 days or less following the acquisition will not be eligible for a mortgage to be insured by FHA. FHA’s analysis disclosed that among the most egregious examples of predatory lending was on “flips” that occurred within a very brief time span, often within a matter of days. Thus, the “quick flips” were eliminated for at least 90 days.  No FHA loan for you.

Your not worried because your lender is a very smart guy, he’s a Senior Loan Officer.  He says, “Don’t worry, we will just do a conventional loan.”  Since you have enough to put down 10% for a conventional loan, you think your problem is solved.  Your lender is a genius.  You start packing all of your belongings into boxes, ordering utilties for the new house and getting ready for the “big” move. 

A few weeks go by and your lender calls you and says, “We have a major problem.”  Your loan was declined because the mortgage insurance company won’t issue a mortgage insurance certificate because the property is being “flipped.”  Oh and by the way, even if you can put down 20% to avoid mortgage insurance we still can’t do your loan.  You say, “Huh???”  “You can’t do the loan?”  That’s right, he can’t do the loan because of new guidelines by most major lenders that won’t allow financing on flipped properties.  What are you going to do now?? 

Your Realtor is very sharp, experienced and is determined to get this home for you.  She has called four different mortgage companies.  Luckily, one of the lenders she talks to also has a good network and he refers her to another lender.  We can still do your loan with conventional financing, even if the property is “flipped”.  There is no specific time frame required for conforming conventional seasoning on a purchase transaction.  However, the appraiser must provide a 12-month listing history for the property. Frequent listings and/or sales also require explanation on each occurrence or listing and should include the data source(s), offering prices, date(s), and any further evaluation as they may indicate “flipping”.

Closing day comes and you finally get the keys to your house.  You’re so excited that you tell everyone you know, who is looking to purchase a home in Phoenix, to call your Realtor and their new “preferred” Mortgage Consultant.  Life is good.

But what happens next?  Investors that have secured a hard money loan are now typically saddled with a short-term loan holding an extremely high interest rate.  Alternatively, purchasers that facilitated these transactions utilizing their own funds, while initially giving them the upper hand, may not want all of their funds wrapped up in the property.  The most logical option for many of these investors is to refinance.  Please note that a mortgage placed on a property that is currently held free and clear is always considered a cash-out refinance. 

Given the ever changing requirements within the mortgage industry today, the following is an overview of some of the current guidelines to help these individuals:

Seasoning Requirements –

• Rate/Term – There are NO seasoning requirements for the borrower to be listed as the owner of record.
• Cash-Out – The borrower must be listed as the owner of record for a minimum of 6 months prior to the loan application date.  No title transfers are allowed during this period.

Qualifying Ratios –

• Loan-to Value – The LTV on the subject property must be less than or equal to 75 percent
• Debt-to-Income – The maximum DTI for investment properties is 50 percent

History of Rental Management –

• Borrower must have a 2 year history of managing rental properties evidenced by the most recent 2 years tax returns in order to use rental income for qualification factors.
• EXCEPTION: 
  • The 2 year history can be waived if the borrower qualifies for the mortgage with the full payment (PITI) of the subject property, excluding rental income. 
  • OR……
  • Rate/Term refinance has an LTV greater than or equal to 75 percent
  • Cash-Out refinance has an LTV greater than or equal to 70 percent           

We have closed an increasing number of these types of transactions over the last year.  The absence of seasoning requirements for rate/term refinances has saved borrowers a tremendous amount of money in high interest payments by allowing them to take advantage of current market rates.  Cash-out refinances has also allowed borrowers to liquidate the majority of their initial investment.  Either way, having the knowledge surrounding the current regulations will assist borrowers in making educated decisions on what is their best option moving forward.

We also have a resource if you’re an investor looking to sell your property and have concerns about seasoning, click here.