FHA/HUD Property Flipping Guidelines

FHA/HUD prohibits property flipping in HUD's single family mortgage insurance program by providing additional exceptions to the time restrictions on sales. The rule:

Property Flipping described under FHA

Property filliping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lenders collusion with the appraiser. FHA's policy prohibiting property flipping eliminates the most egregious examples of predatory flips of property within the FHA mortgage insurance programs.

Overview of FHA's Property Flipping Policy-

FHA requires that:

1.       Only owners of record may sell property that will be financed using FHA-insured mortgages:

2.       Any resale of property may not occur 90 or fewer days from the last sale be eligible for FHA financing and

3.       That for sales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100% or more, FHA will require additional documentation validating the property's value, FHA also has flexibility to examine and required additional evidence of appraised value when are resold within 12 months.

 Sale by Owner of Record-

To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA purchase money mortgages regardless of the time between resale's. The mortgagee lender must obtain documentation verifying that the seller is the owner of record and submit this to HUD as part of the insurance endorsement binder: it is to be placed behind the appraisal the left side of the case binder. This documentation may include, but is not limited to, a property sales history report, a copy of the recorded deed from the seller, or other documentation such as a copy of a property tax bill, title commitment or binder, demonstrating the sellers ownership of the property and the date it was acquired. Mortgagees participating in the lenders insurance program are to retain this documentation and provide it to FHA upon request.

Resale's Occurring 90 Days or Less Following Acquisition-

If the owner sells a property within 90 days after the date of acquisition, that property is not eligible security for a mortgage insured by FHA unless it falls within one of the exceptions to the time restrictions set forth by FHA regulations. FHA defines the sellers date of acquisition the date of settlement on the sellers purchase of that property. The resale date is the date of execution of the sales contract to the buyer that will result in a mortgage to be insured by FHA.

As an example, a property acquired by the seller is not eligible for a mortgage to be insured for the buyer unless the seller has owned that property for at least 90 days. The seller must also be the owner of record.

Resale's Occurring between 91-180 days Following Acquisition-

If the resale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a second appraisal made by another appraiser if the resale price is 100% or more over the price paid by the seller when the property was acquired. As an example if the property is resold for $100,000 within 6 months of the sellers acquisition of that property for $50,000, the mortgage lender must obtain a second independent appraisal supporting the $100,000 sales price. The mortgage lender may also provide documentation showing the cost and extent of rehabilitation that went into the property resulting in the increased value, but must still obtain a second appraisal. The cost of the second appraisal may not be charged to the homebuyer. FHA also reserves the right to revise the resale percentage level at which the second appraisal is required by publishing a notice in the federal register.

Resale's Occurring between 91 days and 12 months following acquisition

If the resale date is more than 90 days after the date of acquisition the seller but before the end of the 12th month following the date of acquisition, FHA reserves the right to require additional documentation from the lender to support the resale value if the resale price is 5% or greater than the lowest sale price of the property during the preceding 12 months. At FHA's discretion, such documentation may include but is not limited to an appraisal from another appraiser. FHA will announce its determination to require the additional appraisal and other value documentation, such as an automated valuation method (AVM), though a Federal Register issuance. This requirement may be established either nationwide or on a regional basis at FHA's discretion.

Exceptions to the 90-day restriction

The following sales are exempt from the time restrictions provided by FHA.

·          Sales by HUD or its real estate owned.

·          Sales by other United States Government agencies of single family properties pursuant to programs operated by these agencies.

·          Sales of properties by non profits approved to purchase HUD owned singled family properties at a discount with resale restrictions.

·          Sales of properties that are acquired by the sellers by inheritance.

·          Sales of properties purchased by employers or relocation agencies in connection with relocations of employees.

·          Sales of properties by sate and federally chartered financial institutions and Government Sponsored Enterprises.

·          Sales of properties by local and state government agencies.

·          Upon FHA's announcement of eligibility in notice sale of properties in areas designated by the president as federal disaster areas, will be exempt from restrictions of the property-flipping rule. The notice will specify how long the exception will be in effect and the specific disaster area affected.

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