The dream of homeownership is becoming increasingly difficult for many Americans. With U.S. home prices surging to 4.0% in 2024, the housing market remains highly competitive. An FHA loan can be a lifeline for first-time home buyers. However, it’s essential to understand the potential pitfalls.
One major concern is the increase in home flipping. With a staggering 67,817 homes flipped in the first quarter of 2024 alone, it’s crucial to know about the FHA flipping rule.
Understanding this rule is just one part. Getting pre-approved for an FHA loan is also significant. Streamline your home-buying process by securing a pre-approval today!
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What Does FHA Flipping Rule Mean?
Home flipping involves the purchase and resale of any property quickly. While buying a property, the FHA rule protects the buyer’s interest. There are FHA guidelines other than the FHA flipping rules to protect the buyer’s interest.
These guidelines are strict as compared to other lenders’ guidelines, which include:
- A minimum credit score of 580.
- The down payment should be at least 3.5%.
- The total debt-to-income ratio should not exceed 43%.
What Are FHA Flipping Rules?
You will have to abide by the 90-day flip rule if you plan to purchase a flipped home with an FHA loan. There are a few situations where FHA financing is possible within the 90-day window.
The 90-Day Flip Rule
The mortgage lender requires the FHA appraisals to check whether the property falls under the FHA 90-day flip rule. If the 90-day rule applies to the property, the lender might reject the loan.
This rule protects borrowers and lenders from investing in worn-out properties. Hence, as a buyer, you should wait for 90 days before you can buy a flipped home.
The 180-Day Flip Rule
Any home sold between 91 and 180 days for twice its original price is also subject to the FHA flipping rule. According to FHA guidelines, a second appraisal might be necessary here.
A second home appraisal helps the lender verify whether the seller is asking for a fair value on the house. The second appraisal must meet the following guidelines:
- The second appraiser can’t be the same as the first one.
- You don’t have to pay the appraisal costs.
- The lender must obtain a 12-month chain of title.
- The lender considers the lower value if the second appraisal value is 5% or higher than the first.
- The seller must present the relevant documents to support the price increase.
Why Does the FHA Have a Flipping Rule?
The FHA implemented the flipping rule to protect you from fraudulent practices where sellers may use tactics. Further, by restricting the resale of properties within a short period, FHA ensures you are not overpaying for artificially inflated quick resales.
If the purchased properties are superficially improved or renovated quickly and resold at a higher price. This fraud of adding little to no value is prohibited due to the rule. Besides it helps maintain the market stability by discouraging rapid flipping. This helps maintain more stable property values.
What Are the Exceptions to the FHA Flipping Rule?
FHA flipping rules come with a few exceptions, which include:
- Properties sold by government agencies like the HUD
- Newly built properties
- Homes sold by non-profit organizations
- Inherited homes
- Properties owned by relocating employers or agencies
- Properties located in Presidentially Declared Major Disaster Areas (PDMDA)
How to Buy a Flipped Home Without an FHA Loan?
You cannot buy a flipped home through an FHA loan if the seller hasn’t owned the property for at least 90 days. However, there are different types of loans that you can apply for:
- Conventional Loans: These loans are more flexible than FHA loans with lower interest if you have a good credit score. Typically you need a credit score of at least 620 or higher with a debt-to-income ratio of 50% for conventional loans.
- VA Loans: The US Department of Veterans Affairs (VA) offers a mortgage program. Veterans and active duty service members are eligible for no down payment and competitive interest rates with VA.
- USDA Loans: The United States Department of Agriculture (USDA) home loans are government-backed mortgages for low-income home buyers. It requires no down payment.
Bottom Line
Flipped homes are resold in a short time to earn profits. Over time, the market for homes that have been turned around significantly increased.
To buy a recently flipped house, you must ensure the mortgage complies with the FHA flipping rules and guidelines. However, there are some exceptions to FHA flipping rules, such as inherited homes, newly built properties, etc.
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Frequently Asked Questions
What are the conventional loan flipping rules?
Conventional loans are more flexible than FHA loans with lower interest if you have a good credit score. Typically you need a credit score of at least 620 or higher with a debt-to-income ratio of 50%.
Can you use FHA for investment property?
FHA loans can't be used for investment properties because they are mainly for owner-occupied properties. The Federal Housing Administration requires you to live on the property when you acquire an FHA loan.
Why are there FHA flipping guidelines?
FHA flipping guidelines protect buyers by requiring a 90-day waiting period before a flipped house can be purchased with an FHA loan. Further, by restricting the resale of properties within a short period, FHA ensures you are not overpaying for artificially inflated quick resales.
