HUD makes it hard to FLIP OFF FHA!

I was recently asked by a real estate professional about FHA’s anti-flipping rule.  Since I did some digging on the subject I thought I would post what I found because I suspect many others are coming across similar circumstances.

What is the anti-flipping rule?

It prevents homebuyers from obtaining FHA financing when they write an offer to buy a home within 90 days of the seller obtaining ownership.  In other words, if Bill buys a home today and immediately puts it back on the market tomorrow a homebuyer using FHA financing would not be able to write an offer to buy it until 90 days has gone by.  There are a few exceptions including when ownership has transferred via foreclosure or via the distribution of an estate.

Why does FHA have this rule?

FHA originally put this rule into place to prevent fraudulent property flippers, lenders, and appraisers from churning a property and cashing-out nonexistent equity.  These schemes actually took place during the boom years and ended up costing FHA millions.

What else does a homebuyer need to know?

The anti-flipping rule doesn’t totally prevent the usage of FHA financing to acquire a legitimately “flipped” home.  The homebuyer must wait until the 91st day of the seller’s ownership to write an offer to buy the home.  Furthermore,  if a sale takes place within the first year of a seller’s ownership a FHA underwriter is likely to require 2 appraisals no matter what the circumstance.  If the seller has improved the property and is selling the home at a premium from the price they paid then the FHA underwriter will also likely request seller-provided documentation to justify the increase in the homes value (i.e. receipts from contractors for services and materials).