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3/05/11 - FHA WAIVES 90 DAY FLIPPING RULE

         If you’re a house flipper, you will certainly want to be familiar with the “FHA 90-Day Rule,” more-so than any other housing regulation. It’s so important that I’m writing a long article about it, as opposed to just summing it up in a sentence or two…

First, here’s the text of the actual FHA regulation:

(b) Time restrictions on re-sales—(1) General. The eligibility of a property for a mortgage insured by FHA is dependent on the time that has elapsed between the date the seller acquired the property (based upon the date of settlement) and the date of execution of the sales contract that will result in the FHA mortgage insurance (the re-sale date). The mortgagee shall obtain documentation verifying compliance with the time restrictions described in this paragraph and must submit this documentation to HUD as part of the application for mortgage insurance, in accordance with §203.255(b).

(2) Re-sales occurring 90 days or less following acquisition. If the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage to be insured by FHA.

(3) Re-sales occurring between 91 days and 180 days following acquisition. (i) If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for a mortgage insured by FHA.

(ii) However, HUD will require that the mortgagee obtain additional documentation if the re-sale price is 100 percent over the purchase price. Such documentation must include an appraisal from another appraiser. The mortgagee may also document its loan file to support the increased value by establishing that the increased value results from the rehabilitation of the property.

As you can see, the 90-Day Rule is actually a set of rules regarding the resale of property to FHA buyers.

Here are the key points of this rule:

• A property is ineligible to be sold to an FHA buyer within the first 90 days after the most recent purchase. In other words, if I buy a house today, and want to resell it to a buyer using an FHA loan, I have to wait 90 days (91 actually) from today before I can resell the property to that buyer. As a house flipper, it should be clear why this rule can cause frustration — it generally takes about 4-5 weeks to rehab a house after I purchase it, but given this rule, I can’t resell the house to an FHA buyer for at least 8-9 after that; that means I either hold off putting the property on the market, or I risk finding a buyer but not being able to close for nearly two months.
• A property is eligible to be sold to an FHA buyer after 90 days, but any sale occurring before 180 days that is at least 100% over the purchase price is subject to additional appraisal scrutiny. In other words, if I buy a house today, and want to resell it a buyer using an FHA loan in 91-180 days for more than double what I bought it for, I will have to get two appraisals for the property. While this rule isn’t nearly as harmful as the first one — if I plan to sell it for more than double what I bought it for, hopefully it’s really worth that — it can still cause issues. Appraisals these days are all over the map, and anytime you need to rely on multiple appraisals to support your sale price, you run some risks of at least one of them coming in low. Additionally, the second appraisal takes time and money, often delaying these property closings.

Those are the general rules/guidelines that will affect you as a flipper, but there are some details that must be kept in mind as well:

FHA underwriting won’t consider the buyer’s loan unless the Purchase Contract, the Appraisal, and the Loan Application are dated at least 91 days from the date the current seller purchased the property

What this means specifically is that while a buyer can submit a letter of intent or a contract prior to the 90-day mark, for it to be considered by FHA underwriting, a new contract must be signed (and all loan preparations must be completed) after the 90-day mark.

Additionally, while not a formal requirement by the FHA, many FHA underwriters will stipulate that the 90 days doesn’t start the day the seller purchased the property, but instead, on the day the Warranty Deed was recorded. And in many places, the closing attorney legally has at least 60-90 days to send the Warranty Deed to the records office, and it can take a week or two after that before the deed actually gets recorded; therefore, it could be 90 days or more after the property is purchased before the FHA 90 day clock even starts ticking! Meaning it could be up to 6 months before you can sell the property to an FHA buyer!

While not all FHA underwriters will require the 90-day seasoning to start after the Warranty Deed is recorded, keep in mind that some will. A good flipper will control his/her deal from the outset, and part of controlling the deal is to control the lending process; make sure you know the rules that your buyer’s lender will be following to get the deal done, and if those rules don’t meet your basic requirements, insist that your buyers use a lender that you are willing to work with (and who is willing to work with you).

Regardless, if you’re a house flipper who targets FHA buyers, be aware of these rules, as they can severely impact your holding time and holding costs. At very least, make sure you work