If you’re buying a flipped property and are planning to use a loan backed by the Federal Housing Administration (FHA), you need to be aware of the FHA flip rule, also known as the 90-day FHA flip rule. It could prevent you from buying the property or cause delays.
The main thing to know is you can’t use an FHA loan for properties that have been owned for less than 90 days by the seller. This is to prevent fraud and to protect you and the lender.
We’ll explain everything you need to know about the rule, including:
• What is property flipping and what to watch out for
• The purpose of the FHA flipping rule
• How timing of the purchase contract affects FHA financing
• What exemptions there are
• How to comply with FHA guidelines on flips
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Questions? Call (844)-763-4466.
What Is Property Flipping?
Property flipping is where an investor acquires a property with the intent of quickly selling it for a profit. The investor can renovate, landscape, develop raw land, or complete other projects to improve the property and then put it right back onto the market. It’s also common to generate profit through rapid property appreciation in hot real estate markets.
None of the above activities is prohibited. But when a property is sold for a large profit soon after being acquired, it could potentially signal illegal activity. Illegal property flipping is where the investor sells the property at an artificially inflated price, usually through collusion with the appraiser. Overvalued properties can be a problem for legitimate buyers as well as mortgage lenders, including with FHA loans. Hence the flip rule the FHA has created to protect borrowers.
Reasons for FHA Flipping Rules
The purpose of the FHA flip rules is to prevent the FHA from taking on loans at inflated values, and in the process, protect buyers from being taken advantage of. The FHA states that most flipping occurs within days of the original purchase with little improvement taking place. (An FHA loan buyers guide details other important rules surrounding FHA loans.)
FHA Flipping Rules Explained
The FHA flip rules are primarily concerned with the amount of time the property has been owned prior to being resold. It was implemented in 2003 by the Federal Housing Administration to try and prevent the kind of illegal flipping mentioned previously. Lenders rely on information provided by an appraiser to follow the rule. The nitty gritty:
90-Day Flipping Rule
Under the FHA 90-day flip rule, you can’t finance property with an FHA loan if it was bought by the seller less than 90 days ago. Other requirements include:
The property must be sold by the owner of record
The lender must obtain documentation verifying the seller as such
The purchase can’t involve a sale or assignment of contract
The FHA counts 90 days from the seller’s day of settlement to the day the next contract is signed. There are some additional requirements for purchasing a flipped property from 91 to 180 days after the seller’s day of settlement.
How the FHA Flip Rules Work from 91 to 180 Days
If the property is sold between 91 and 180 days from the settlement date, a second, independent appraisal may be required to verify the value. The second appraisal is required if the value is more than 100% above the price the seller paid. The seller cannot require the buyer to pay for the second appraisal. For example, if the home was purchased by the current owner for $100,000 and the new value is $200,000 or more, a second appraisal would be required.
Exceptions to the 90-Day Rule
There are a few exceptions to the 90-day rule. A property may be eligible for an exemption from the FHA flip rule if it was acquired for its owner by an employer or a relocation agency or if it is:
• HUD Real Estate Owned
• Sold by local, state, or federal government agencies
• Sold by Fannie Mae or Freddie Mac
• In a presidentially declared disaster area
• An initial builder sale
Property Eligibility Requirements
There are no property requirements with the FHA flip rule — the rule applies equally to all properties with the exception of those noted above. The only factor the FHA is concerned with when it comes to this rule is the amount of time the seller has owned the property. If it’s less than 90 days, you can’t finance it with an FHA loan. And if you’re between 91 and 180 days and the amount is 100% more than what the property previously sold for, two appraisals may be required.
Recommended: Minimum Down Payment for FHA Loan
Complying with FHA Flipping Guidelines
It’s easy to comply with FHA flipping guidelines. That’s because your lender can’t give you an FHA loan if the property has been owned less than 90 days.
The onus falls to the FHA appraiser to properly document the date and amount of prior transactions in the appraisal report. The lender submits this information to the FHA when making your application.
Documenting Property Acquisition
The appraiser is tasked with documenting the date of acquisition for the seller and will also verify that the seller is the owner of record. Verification may include documents such as the property sales history, a copy of the recorded deed, a copy of the property tax bill, and a title search.
Appraisal Requirements
Appraisers must include all transactions in the previous three years on their Uniform Residential Appraisal Report (URAR) to submit to the lender. They must also consider and analyze the comparables used to determine the value of the property being sold.
Consequences of Not Following the FHA Flip Rules
The main consequence for not following the FHA flip rules is that your mortgage application may be denied.
Alternatives to FHA Loans
If you have your eye on a flipped property that has miraculously been significantly improved in less than 90 days, there are other roads you can take to acquire it. These include:
• Waiting to write the contract until the seller has owned it 91 days (and getting that second appraisal if necessary)
• Financing with a conventional loan, or applying for a VA loan if you are eligible
• Arranging seller financing
No other loan type has a flip rule like the FHA, so if you’re really intent on buying that flip, you can also explore another loan type. Read up on FHA loans vs. a conventional mortgage, then talk to a lender, ideally one that offers both FHA and conventional loans.
The Takeaway
For the most part, the FHA flip rules are simple to understand and follow. Basically, you won’t be able to get an FHA loan on a property that the seller purchased less than 90 days ago. The lender is the one who is required to follow the rule.
Documentation requirements fall on the appraiser and the lender, so it’s important to start with a lender you trust. There’s nothing more steadying than a lender that can be there for you every step of the way.
SoFi offers a wide range of FHA loan options that are easier to qualify for and may have a lower interest rate than a conventional mortgage. You can down as little as 3.5%. Plus, the Biden-Harris Administration has reduced monthly mortgage insurance premiums for new homebuyers to help offset higher interest rates.
Another perk: FHA loans are assumable mortgages!
FAQ
What qualifies as a property flip under FHA rules?
It’s not the property that has requirements, it’s the timeline. Any property can be considered a flip if it’s owned for fewer than 90 days.
Can FHA borrowers purchase a recently flipped property?
FHA borrowers are allowed to purchase a recently flipped property as long as the owner of record has owned the property for at least 90 days. The amount they’re purchasing it for has a limit of 100% of the original value if purchased between 91 and 180 days after the original owner’s purchase, or else they’ll need an additional appraisal. After 180 days, the extra appraisal is asked for at the FHA’s discretion.
How is the 90-day flipping period calculated?
The FHA counts 90 days from the settlement date of the current owner to the day the new purchase contract is executed.
Photo credit: iStock/warrengoldswain
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency. †Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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