Navigating the FHA 90 day rule when flipping

[Luis A.]

I have my latest flip on the market right now and since I have owned it for less than 90 days it is subject to the scrutiny of the FHA 90 day rule. Although this is not the first flip where I have to deal with this, I find that dealing with this rule keeps on changing.

I managed to get two offers on it on the first week but in both cases the buyers lender could not do the loan because I had owned the house for less than 90 days. I was able to find a way around this; here is what I am dealing with:

- This rule only applies to FHA loans but 95% of the buyers out there (at my price point) are using FHA loans

- When I get an offer from a potential buyer and they show me a mortgage pre-approval letter it does not mean anything...most of those lenders all they do is check the buyers credit score. They don't verify income, check tax returns or anything like that. So there is still a very long way to go to actually being approved for a loan.

- Before accepting their offer I call their lender and make sure they are aware that my property is pre-90 day and that they can do the loan. I had two lenders right off the bat tell me they can't do it. This saves everyone A LOT of time.

- I have had to explain the 90 day rule to agents and lenders! Many times they dont' know about it and don't know how it works.

- Like J Scott suggested to me before, I have tried very hard to get the buyer to use my recommended lender instead of theirs. That is because I know my lender can do FHA loans on pre-90 day properties when others can't. However sometimes getting a buyer to switch lenders is met with a lot of resistance so I offer to pay for both appraisals, a longer financing contingency period, I threw in a washer/dryer and let them choose the closing attorney (again, thanks to J Scott tips).

Finally I am finding that although legally it's ok to do FHA loans on pre-90 day properties some banks do not want to do it if the house is being sold for more than 20% of what I paid for it. I have seen this mostly from the big banks (BOA, Wells Fargo, Fifth Third bank, etc.).

If you find yourself dealing with this 90 day rule feel free to send me a note if you need help. I have gotten a lot of practice with it over the last two years ;-)

[J Scott]

Since there is so much confusion about this topic, I just posted a new article about this on my website. Here's the bulk of that text:

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The Old FHA 90-Day Rule

Before 2/1/2010, FHA/HUD had a very clear and very strict rule that basically said, "If you buy a property, you can't resell it to an FHA buyer for at least 90 days after you purchase it."

In fact, in some cases, you couldn’t even sign a contract with a buyer until after 90 days from purchase. And in some cases, the 90 days started after deed recording, not when you purchased the property.

But, as of February of 2010, that restriction was waived, and FHA/HUD replaced it with the following…

The Current FHA Rules

As of 2/1/2010, and at least through December 31, 2012, FHA/HUD now allows investors to resell their properties as quickly as they want to FHA buyers. That said, there are some rules that FHA is putting in place for any quick resales. The two big ones for investors are as follows:

1. All transactions must be arms-length, meaning that there must not appear to be any relationship between buyer and seller. This requirement also indicates that any prior flipping activity on the home in the previous 12 months may be a red flag to the lender.

2. In cases where the investor wants to sell within 180 days of purchase, and where the sale price exceeds the previous purchase price by more than 20%, the lender will be required to take extra steps to ensure the sale is legitimate. This may include a second appraisal and/or a full FHA field inspection.

What This Currently Means in Real Life

Now that I clarified the FHA rules, let me explain how this translates into real life for flippers:

- While FHA will allow quick resales (as soon as you want), not all banks that do FHA loans will do them in the first 90 days. In other words, some banks still adhere to the old FHA guidelines, even though FHA doesn't require it. There are a lot of banks that will now do FHA loans immediately, so ask around to a couple loan officers or brokers and find a bank or two that will do an FHA loan without any time restriction; most of the regional banks will do these, but even big banks like Wells Fargo are now doing them. So, just because one or two banks say no, don't give up.

- If you plan to resell within 180 days, expect that you will need to have two appraisals on the property. Also note that the second appraisal can’t be paid for by the buyer — so either you (the seller) will need to pay for it, or the broker/lender will need to pay for it. This should be negotiated upfront so there are no surprises.

- If you plan to resell within 180, expect that the lender’s underwriter will require you to furnish details of the rehab. This may include renovation details, invoices, receipts, etc — anything to substantiate the work you’ve done.

- If you plan to resell within 180 days, you will need to do enough improvements to justify the higher resale price. There are no specific guidelines on how much work you must do, but if the appraiser or underwriter feels that you haven’t done enough work to justify the new resale value, your appraisal will likely come in low, regardless of comps.

- If there has been a "pattern of flipping" (in this case, that means there has been more than one title change other than an actual foreclosure) in the past year, the lender will likely reject the loan and you may be required to wait 6-12 months to resell to an FHA buyer. This often occurs when an investor purchases from a wholesaler, rehabs and then plans on a quick resale — there are two title changes from the wholesaler to the flipper to the end-buyer, which will be a red-flag for an underwriter, so be aware of this potential issue when buying from wholesalers.

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I've been through this dozens of times, and am happy to answer any specific questions...