Here is a 5000-word article on whether FHA has a flipping rule:
Flip is when a property is bought and resold in a short period of time. Flip can also mean refurbishing and repairing a property before reselling it. The FHA does have restrictions on properties that have recently been flipped. The FHA flipping rules are designed to protect homebuyers from fraud and shoddy workmanship.
What is FHA Flipping Rule?
The FHA flipping rule sets restrictions on how soon a home that was previously sold can be resold if the buyer wants to use FHA financing on their purchase. Specifically, the FHA prohibits the use of FHA financing to purchase a property that has been acquired by the seller within the past 90 days.
There are some exceptions to this 90-day flipping rule. The property may still qualify for FHA financing if:
– The seller acquired the property through inheritance or divorce settlement.
– The seller is a local, state or federal government agency selling the property as part of their programs.
– The seller is a HUD-approved nonprofit selling the property.
– The seller acquired the property through foreclosure.
– The previous sale was to a family member.
– The seller has sincerely attempted to sell the property for the 90-day period but was unsuccessful.
So in summary, the basic FHA flipping rule is that a property cannot be resold within 90 days of acquisition if the buyer wants to use FHA financing. There are some scenarios where an earlier resale is acceptable, but in most cases the 90-day rule applies.
Why Does FHA Have a Flipping Rule?
The FHA flipping rule is designed to protect consumers from predatory or fraudulent flipping practices. Here are some of the specific concerns behind the rule:
– **Shoddy workmanship:** Flippers are incentivized to make quick cosmetic improvements at low cost in order to resell for a higher price. This can sometimes result in surfaces merely being covered up rather than properly repaired. FHA wants to ensure homes are of sound quality.
– **Artificial inflation of value:** Flippers may use dubious or fraudulent comparables when appraising the property in order to artificially inflate the home’s value. The 90-day rule helps curtail this practice.
– **Kickback schemes:** Unscrupulous flippers may take kickbacks from appraisers, contractors or others involved in the transaction. This inflates the home price to the detriment of the buyer.
– **Predatory financing terms:** Flippers may arrange buyer financing with unfavorable terms, such as higher fees, prepayment penalties or balloon payments. FHA financing provides more consumer protections against such predatory lending.
By prohibiting FHA financing on quick flips, the government aims to limit the financial incentive for this type of fraudulent or predatory activity. Legitimate investors can still sell homes they have renovated, but there is a minimum 90-day holding period in most cases. This helps ensure proper repairs and allows time for inflated prices to come back down to actual market value.
What Properties Are Exempt from the FHA Flipping Rule?
As mentioned previously, certain properties are exempt from the FHA’s 90-day flipping rule restriction:
– **Inherited properties:** If the seller acquired the property through the death of a family member, there is no flipping restriction.
– **Divorce properties:** If the property was awarded to the seller as part of a divorce settlement, the flipping rule does not apply.
– **Government entities:** HUD exempts any homes sold by federal, state or local government agencies as part of their official programs.
– **HUD-approved nonprofits:** Properties sold by HUD-approved nonprofits that provide affordable housing are exempt.
– **Foreclosures:** The 90-day rule does not apply if the seller acquired the property via foreclosure or deed-in-lieu of foreclosure.
– **Sales to family members:** Transfers of property to immediate family members are exempt even if they occur quickly.
– **Unsuccessful sales:** If the seller lists the home continuously for 90 days with no offers, the flipping rule may be waived.
These exemptions exist because the FHA views these scenarios as unlikely to involve fraudulent flipping schemes or predatory sales practices. As such, normal FHA financing is allowed irrespective of how soon the homes are resold.
What is the Penalty for Violating the FHA Flipping Rule?
If a property is resold within 90 days of acquisition and does not meet one of the FHA flipping rule exemptions, there are a few potential penalties:
– **Loan denial:** The most straightforward penalty is that the FHA will deny financing for the purchase of the home. The buyer will need to explore other loan options.
– **Temporary lender sanctions:** The lender who originated the loan may face temporary sanctions prohibiting them from doing future FHA loans on other properties.
– **Permanent lender sanctions:** If the lender is a repeat offender, they may face more lasting sanctions including withdrawal of FHA approval and loss of licensed status.
– **Civil fines:** HUD can assess civil fines against participants in unlawful property flipping schemes, including up to $10,000 per violation.
– **Criminal prosecution:** In more extreme cases, flippers involved in systematic fraudulent activities may face criminal prosecution. Punishments can include imprisonment, restitution and prohibition from future real estate activities.
In summary, attempts to use FHA financing for quick flips in violation of the rule will result in loan denial. The lender and other parties may also face civil penalties or criminal charges depending on circumstances.
Tips for Following FHA Flipping Guidelines
Here are some tips for buyers, sellers and lenders to ensure compliance with FHA flipping rules:
– Review the seller’s acquisition date and confirm it was at least 91 days ago.
– Check that the purchase contract does not include suspicious secondary financing or inflated fees that may indicate a predatory flip.
– For quick resales, ensure the property meets one of the FHA flipping rule exceptions (inheritance, divorce, nonprofit, etc.).
– Provide sufficient documentation to validate any flipping rule exemption that is claimed.
– Avoid using questionable appraisal comparables or making inflated value claims to qualify for a higher loan amount.
– Complete repairs properly using licensed contractors rather than just cosmetic coverups.
– Submit the required sales history documentation for the FHA underwriter to review.
– Cooperate fully with any requests from HUD auditors related to anti-flipping compliance.
– Maintain thorough record keeping for any repairs, payments, contracts and other flipping-related documentation.
By following these guidelines, all parties can ensure adherence to FHA regulations and avoid penalties. Legitimate property investment is still readily possible within the rules.
Does FHA Require a Waiting Period Between Sales?
Yes, in most cases FHA does require a waiting period of 90 days between when a property was acquired by the seller and when it can be resold with FHA financing. This flipping rule restriction aims to curtail predatory flipping practices and ensure homes are of sound quality.
The 90-day clock starts ticking when the seller officially takes ownership of the property. There are some exceptions to the waiting period such as inherited properties or sales to family members. Sellers and lenders should review the full set of FHA guidelines on property flipping to understand when exceptions may apply.
Absent an exemption, FHA underwriters will deny financing for any property resold within 90 days of acquisition by the seller. So it is important for flippers to be aware of this important restriction and plan their activities accordingly. Legitimate renovations and resales are still possible, but simply outside of the 90-day prohibition window.
Can an FHA Loan Be Obtained on a Property That Was Bought and Resold in Less Than 90 Days?
Generally no, the FHA will not insure a mortgage loan on a property that has been flipped (bought and resold) within 90 days. The 90-day rule is a key anti-fraud policy for the FHA. There are certain exemptions such as inheriting the property or transferring it to a family member. Absent an applicable exemption, any property being resold within 90 days of acquisition is ineligible for FHA financing.
Both the buyer and seller should fully understand the FHA flipping guidelines and restrictions prior to entering any property transaction. Using conventional financing may be an option for a faster deal that does not meet FHA flipping rules. However, the lending terms likely won’t be as favorable for the buyer as an FHA-insured mortgage. Everyone’s best option is to ensure the 90-day rule is followed unless a clear exemption exists.
Is There an FHA Exception for Fix and Flip Properties?
No, there is no blanket FHA exception that allows fix and flip properties to avoid the flipping rule. Any property being resold within 90 days of acquisition still requires an FHA exemption to qualify for financing. Some specific cases where a fix and flip property might still qualify include:
– The property is being sold by a nonprofit housing organization approved by FHA.
– The property is being sold by a government agency as part of an official program.
– The property was obtained by the seller via inheritance following a death.
– The property was awarded to the seller through a divorce settlement.
– The property is being sold to a family member of the seller.
– The seller has tried in vain to sell for 90 continuous days.
Those are the only scenarios where a quickly flipped property that has been renovated might still potentially qualify for FHA financing. Absent one of those documented exemptions, fix and flip properties cannot undergo resale within 90 days using an FHA loan.
While the FHA does want to facilitate affordable homeownership, they view their anti-flipping stance as necessary to prevent predatory sales practices that take advantage of borrowers. Following the guidelines ensures a fair market environment.
Conclusion
In summary, the FHA does have a flipping rule that places restrictions on how soon a property can be resold when using FHA mortgage financing. Specifically, a property cannot have been purchased by the seller within the preceding 90 days. This important rule aims to prevent predatory flipping practices and ensure homes are sound quality.
There are certain exemptions from the 90-day requirement, such as inherited properties or sales to family members. Lenders and borrowers should fully understand the nuances of the FHA flipping guidelines to avoid penalties. When in doubt, allowing at least 91 days between sales is the safest path to remain compliant. Proper planning and record keeping are key to successfully navigating FHA flipping regulations. But the restrictions still leave room for profitable legitimate investment in renovating and reselling homes.