FHA Flip Rule - Short Term Lease

[Mark Spidell]

Does anyone know of any problem with renting to the buyer for a couple of months to help with the FHA 90 day flip rule issue?

[Albert Bui]

HI Mark,

There are FHA stipulations when selling to interested parties, in this case there is an "existing business relationship," if the seller rents the home out to the buyer.

The LTV is restricted to 85% or AKA meaning buyer may need 15% down payment to purchase after this 90 days if the seller decides to rent to this buyer prior to the end of the 90 day flip rule. The buyer will also need to order their FHA case number for the loan file on day 91 or after which means you cant start the file before the 90 days and close on day 91 (not that easy).

Now this isn't an issue if the buyer intended to put down 15% anyway but most people who do FHA only put down 3.5% or less so I'll assume this may be a problem for you.

There are exceptions so you can get the down payment back to 3.5% or 96.5% LTV (same difference).

exceptions to avoid 85% LTV downgrade for FHA:

- A) Family Member Transactions - when the seller is currently a primary resident and is selling to another family member who will buy as a primary residence or when a buyer buys a property owned by another family member in which the borrower has been a tenant for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required. (underwriter will probably want to see six months of bank statement records showing receipt of rents)

- B) Builders Employee Purchase - the 85% LTV restriction is removed or may be exceeded if an employee of a builder, who is not a family emmber, purchases one of the builders new houses or models as a principal residence

- C)corporate transfer - when companies buy a house and sell it to any employee who has been renting from the employer's property 

- D) (applicable to you) Tenant Purchase - 85% LTV restriction may be exceeded if the current tenant purchases the property where the tenant has rented the property for atleast six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.

So basically if the seller rents it out it may delay their sale as they'll need six full months of rental income receipt prior to the buyer being able to buy at 96.5% LTV or 3.5% down payment.