Arn Cenedella

90 day FHA flip rule

The past 18 months I have been quite active with investors who typically pay cash for a foreclosure REO in either East Palo Alto or east Menlo Park.These investors typically fix the property up and place back on the market for sale. These transactions are known as flip due to the short turn-around time from original purchase as an REO and then re-sale to the “end user” – either an owner occupant or long-term investor who wishes to rent the property out.

Last year, FHA had a rule that stated they would NOT fund any purchase of the property that was originally purchased within the past 90 days. In fact, they would not fund a loan on a property when the contract for sale was entered into less than 90 days after to the last purchase date.

So if an investor bought an REO August 1, 2009 – fixed the property up and put it back on the market, any buyer wishing to use FHA financing to purchase the fixed-up house could not ENTER INTO CONTRACT on this property until 90 days after August 1, 2009 or November 1, 2009.

After a while, FHA realized this rule was messing up the market. In areas hard hit by foreclosures, it was in everyone’s interest to get these foreclosure properties sold, fixed up, and then re-sold to owner occupants. Having distressed vacant properties all around a neighborhood does nobody any good.

FHA then amended the rule to allow funding of flip properties. However, there are some strongs attached.

Justin McHood in BiggerPockets lays out how different lenders apply this FHA 90 day flip rule.

So if you are considering buying a property with FHA financing and you believe the property was recently purchased, be sure to have your agent find out the date of the prior purchase and then contact your specific FHA lender to see what their guidelines are.

This entry was posted on Tuesday, March 23rd, 2010 at 4:04 pm and is filed under Credit Information, East Palo Alto real estate, First-time home buyers, Foreclosures, Investment Real Estate, Menlo Park Real Estate, REO, Real Estate Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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