A fully refurbished property might be rather enticing when you're looking for your future home. But, you might need help having your financing approved if you want to use an FHA loan to buy a property that has just had renovations.
The FHA flipping rule has the potential to prevent your application for FHA financing from being approved, even if you have good credit and enough money for a significant down payment.
You should become familiar with the FHA guidelines regarding flipping, whether you're a buyer trying to buy a property that has been rehabilitated or an investor looking to flip a house. Anything you need to know will be explained here.
FHA Guidelines for Flipping
It should come as no surprise that an FHA loan has numerous guidelines and limitations, given that it is a government-backed mortgage.
Home purchasers who want to qualify for FHA loans must take into account additional standards, such as FHA guidelines for flipping, in addition to the minimum credit score requirements and the maximum debt-to-income (DTI) ratios.
In case you forgot, a flipped property is a house that is quickly purchased and sold again. House flippers are typically real estate investors that buy a house that requires work. Before selling and, ideally, making a profit for the investment, the investor will typically do repairs and renovations to the property to raise its value.
90-Day Flip Rule for FHA
The FHA's 90-day flipping rule may apply if you wish to use an FHA loan to finance a home that you plan to flip. You cannot use an FHA mortgage to purchase a home within 90 days of its most recent sale due to the FHA flip rule.
In other words, in order to qualify for an FHA loan, the seller of a home that has been flipped must have owned it for at least 90 days prior to selling it to you.
FHA will not approve your loan if you attempt to purchase a home that has recently sold.
Lenders rely on FHA evaluations to certify the home has yet to be sold in the last 90 days in order to ensure borrowers don't transgress FHA guidelines.
The FHA's 91-180 day sales window applies to flips.
There isn't a clear-cut prohibition against obtaining an FHA loan to buy a house that just sold between 91 and 180 days ago. To purchase a home that was recently sold, however, there are a few requirements you must fulfill.
If a homeowner is attempting to sell their house using an FHA loan at this time, FHA guidelines demand that lenders seek a second appraisal (by a different appraiser) if the buyer's offer is twice as much as the seller's original purchase price.
Let's imagine you wish to use an FHA loan to purchase a $400,000 house. The house was upgraded after the seller paid $200,000 for it four months ago.
In order to prove the growth in the property's worth, the lender would need to obtain a second appraisal. A second assessment is still necessary, but the lender may also provide proof of the renovations to support the improved worth.
The FHA may also need additional documentation for sales that take place more than 90 days but less than 12 months after the seller purchased the house. In particular, if the sales price is 5% or more than the home's lowest sales price over the previous 12 months, the FHA may request a second appraisal.
