FHA Buyers and the Realtors® who represent them are facing a shrinking pool of compatible homes to choose from. Ironically, the latest cuts stem from HUD’s re-implementation of FR-4615 Prohibition of Property Flipping in HUD’s Single Family Mortgage Insurance Programs, better know as the “FHA Anti-Flipping rule” or “90-day Seasoning Requirement” initially enacted in 2003.
As of January 1, 2015, Buyers who are using FHA financing once again aren’t able to make offers on certain properties as soon as non-FHA financed buyers.
Originally designed to protect FHA Buyers from illegal flipping schemes and curtail mortgage fraud, the Anti-Flipping rule prevents applicants from successfully getting approved for financing on a property where a Seller has owned the property for less than 90 days. Timing of ownership is measured from the Seller’s deed recording date, not the closing date, which can vary up to several months. (Note: The seasoning requirement does not apply to REO or RELO properties, properties acquired through inheritance, or GSEs.)
A Big Loss
The sad truth is that for FHA Buyers, it is the homes that have been renovated and are being sold by investors (flippers) that are often the most desirable and compatible choices with their financing type in terms of property condition. And, in our competitive Seller’s Market, DFW investors will have zero motivation to wait around for an FHA buyer to be an eligible candidate in the offer pool.
Avoid Getting Blindsided
We can hope to see Sellers and their Listing Brokers begin to adopt a voluntary disclosure strategy noting when subject properties are ineligible for FHA financing or restricted by the 90-Day Rule, (e.g., “Per FR-4615, FHA Offers considered after mm/dd/yy).
Until then, the onus will fall to Buyers and their Agents to perform the necessary due diligence up front to protect their time and interests from being wasted on a property they cannot purchase.
After 90 Days
For a patient and lucky FHA Buyer, Day 91 brings new hope; however, a successful transaction will still be subject to the same HUD guidelines. For FHA-backed offers accepted on days 91 – 180, additional requirements come in to play.
The purchase agreement cannot be sold or assigned.
Where the contract price exceeds the Seller’s previous purchase price by 100%+, the buyer’s lender will be required to:
- Order two appraisals, and the Buyer may only pay for one.
- A home inspection will be mandatory
- Seller will be required to furnish details of the rehab (invoices, receipts)
In addition, any prior sales history dating back up to 3 years on the property will be scrutinized for a “pattern of flipping”, which often occurs when an investor purchase from a wholesaler. If this is the case, the Buyer’s loan will likely be rejected, and the Seller would be required to wait an additional six to twelve months in order to successfully sell to an FHA Buyer.
The same rules apply for properties falling between 91 and 365 days and the resale price is 5% or greater than the lowest sale price of the property during the preceeding 12 months.
In A Nutshell
The writing is on the wall for FHA Buyers… the house hunt just became a little more challenging. Finding a flip should immediately trigger the following questions:
- What was the Recording Date of the Seller’s Purchase?
- What was the cost basis (Seller’s purchase price)?
- Was the property purchased from another investor or wholesaler?
- Can the renovation costs and (After Repair Value) ARV be substantiated?
Leveraging the professional services of a competent DFW Metroplex Buyer’s Agent can help you get the answers you need to make educated and informed decisions, and keep your search efforts focused on worthy property candidates.
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