The 90 Day Flipping Rule ... Some Lenders Have One While Others Don't

UPDATE: January 15, 2010

HUD TAKES A NEW POSITION ON THE 90 DAY FLIP RULE … It’s OK Now!

If you’re not familiar with the 90 flip rule, check out my July 17, 2009 post below for background. It will help you understand why HUD’s change of mind is great news for everyone! HUD now believes the real estate market will benefit by allowing buyers to use FHA financing to purchase a home even when the seller has been on title for less than 90 days. This is a temporary waiver of the 90 rule for one (1) year and takes affect on February 1, 2010. With tight underwriting guidelines, many home buyers are realizing that FHA financing is their only way to afford home ownership. Here are more reason why I like it:

• FHA buyers will have more homes to choose from
• Investors will be able to attract a larger pool of home buyers
  Buyer and seller agents will increase their closing ratios
• Mortgage brokers will have more lending options for their clients
  

HUD’s updated policy comes with restrictions designed to prevent fraud so investors … pay attention:

1) There can be no relationship or interest between the seller, buyer or other parties to the transaction

2) Seller’s profit is limited to 20 percent above their acquisition cost

3) HUD may allow a sales price in excess of the 20 percent limit if the lender can document legitimate rehabilitation to the property and/or a second appraisal supporting value. In addition, the lender must order a property inspection and provide the report to the buyer prior to closing.

KEY INFORMATION: Home buyers should expect some FHA lenders will not follow HUD’s waiver and continue to impose the 90 day restriction. When getting pre-approved for financing, I suggest home buyers ask their mortgage advisor if they have lenders who accept HUD’s waiver before you go shopping to avoid surprises later.

These are highlights of HUD’s temporary 90 flip rule waiver. Let me know if you would like more information or have questions.

ORIGINAL July 17, 2009 post

With the hottest segment of today's market focused on homes priced below $300,00o, first time home buyers and investors are finding great deals. There's nothing wrong with an investor buying a home in need of some TLC, making improvements and selling for a profit. This is the essence of property flipping but when the buy and sell occurs within the first 90 days, alarms go off and everyone involved needs to understand there are rules to play by. The investor who purchases a property for cash has no restrictions when it comes time to flipping it. On the other hand, a buyer who is financing their purchase needs to understand there are lenders who will not approve financing for these properties during the first 90 days. So it's not only buyer beware but seller, realtor and mortgage professional too.

Let me clarify one important point. A bank who forecloses on one of their mortgages is not subject to flipping rules (at this time). Once they take title to a property they can immediately sell it to a buyer who is financing the purchase. The flipping rule is an place to prevent fraud by investors so it's directed at those attempting to sell a property for a big profit within the first 90 days of ownership.

Here's another important point. Not all lenders have a 90 flipping rule. Oh no ... that would make things too easy. Let's start with HUD because so many buyers in this market are using FHA or VA to finance their purchase. FHA says NO to flipping and to be on the safe side, don't even consider entering into a purchase agreement until day 91 (I'll explain why in a minute). The VA doesn't have a flipping rule. Fannie and Freddie DON'T either (conforming loans) but have tightened their fraud guidelines. Here's the catch ... MOST mortgage banks/lenders have a 90 day flip rule that prohibits financing and their rules triumph all others. Some will not allow the purchase contract to be dated within the flip period while others are OK with it. Another example includes preventing the seller from making unreasonable profit and scrutinizing appraisals even further. Rules vary from lender to lender. If you decide to buy one of these homes, have your mortgage advisor shop for the right lender to get the deal done.

The real estate markets are dominated by short sales and foreclosures. Buyers get pretty excited when they find a home for sale by what we call a "regular" seller. This is your first heads up. Buyers and their agents need to do their homework. Find out when the owner took title to the property, how much they paid for it and if they made any material improvements. If the property is being flipped, you have some decisions to make. Find a mortgage lender who will approve financing for the purchase within 90 days or negotiate with the seller for an escrow to close on day 91. Since conforming loans are subject to HVCC appraisal rules and require the buyer to pay for an appraisal "upfront" you'll want to make sure all aspects of the purchase meets your lender's guidelines before shelling out those bucks.