FHA Flip Rules: What You Need To Know

Transforming an older house into a beautifully remodeled, modern version for resale is a rising trend in the real estate market. The allure of shiny, new properties is undeniable for many prospective home buyers. However, if you’re considering purchasing one of these renovated properties using an FHA loan, it’s prudent to acquaint yourself with the FHA flipping rule to avoid any surprises during the property transaction. 

Here’s a look into the FHA flipping rule and its implications on FHA financing approval.

Understanding FHA Flipping Regulations

When considering purchasing a flipped home using an FHA loan, it’s crucial to adhere to the FHA 90-day flipping rule. This regulation dictates that sellers must have owned the flipped property for over 90 days before potential buyers can make a purchase.

House flippers typically acquire distressed properties, give them a makeover, and then sell them at a profit. They often search for potential properties in foreclosures, tax sales, and auctions to secure a good deal. Successful flippers strategically invest in renovations that maximize profitability.

Property flipping can be lucrative for investors who understand the market. FHA loans offer government-backed mortgages with more lenient financial criteria than conventional loans. This means individuals with significant debt or lower credit scores may still qualify for home financing through an FHA loan.

The FHA defines flipping as the quick purchase and resale of a property. If a seller enhances a property to raise its value, it might fall under the FHA flipping rule. Lenders determine the 90-day timeline by examining the deed recording date and the resale date indicated in the sale contracts.

FHA flipping rules are usually classified into two groups: properties owned for less than 90 days and those owned for 91 to 180 days.

90-Day FHA Flip Rule

Per FHA flipping guidelines, lenders need FHA appraisals to verify that the FHA 90-day flip rule doesn’t apply to a specific property. The appraiser will assess the property’s ownership history for the past three years. If the time between the new home sale contract and property ownership is under 90 days, FHA lenders may reject the mortgage application.

Therefore, as an FHA home buyer, you should wait at least 91 days before finalizing your property purchase. Once this waiting period elapses, you can proceed with securing home financing via an FHA loan.

91 – 180 Day FHA Flip Rule

While obtaining FHA loan approval beyond the 91-day mark is simpler, there exists a flip rule for properties resold and owned for 91-180 days, adding a layer of complexity to the qualification process. If the property is resold:

• occurs between 91 and 180 days
• The purchase price exceeds 100% of the amount the seller originally paid for the home.

A second appraisal is required prior to securing financing with an FHA loan and proceeding with a purchase agreement.

The second appraisal must adhere to the FHA guidelines, ensuring compliance with the specified criteria.

• Another appraiser is required to conduct the second appraisal.
• The appraisal cost can’t be covered by the buyer.
• The lender needs to acquire a 12-month history of ownership changes detailing property resales.
• If the second appraisal value exceeds the first by 5%, a lower appraisal value is applied.
• Evidence exists to substantiate the rise in property value.

Exceptions to the FHA Flipping Rule

Certain exceptions exist within FHA flipping regulations, such as:

• Resales by HUD, other governmental agencies, or through the REO program.
• Employers obtaining properties for relocating employees.
• Properties passed down through inheritance.
• Real estate sold by nonprofit entities
• Properties located in a Presidentially Declared Major Disaster Area (PDMDA) that comply with HUD regulations.
• Newly constructed properties

Alternative Options If FHA Flip Rule Exists

Seeking FHA financing for a new home where the owner bought the property within 90 days? Chances are slim with an FHA lender. Thankfully, if FHA isn’t an option, there are various loan types to explore, be it government-backed or conventional.

VA loans share similar rules for purchasing flipped homes, but non-conforming loans like USDA loans might suit you better. USDA loans simply require the property to meet loan standards and pass an inspection. 

Consider going for a conventional loan as an alternative. Remember, however, that conventional loans come with stricter criteria compared to FHA loans. Understand the requirements before proceeding.

Key Takeaway

When looking to buy a flipped home using an FHA loan, the FHA flipping rule could complicate things. However, if you’re ineligible for an FHA loan, there are other financing avenues to explore. Consider conventional lenders open to applicants with lower credit scores. By weighing your choices, you can find the right financing fit.Interested in learning more about securing a loan for flipping homes?