FHA 90 day Rule applies to the Insurance

The Federal Housing Administration (FHA), which was in part created by the National Housing Act of 1934, puts out various rules about their loan offers and insurance. In general these rules are expected to protect the market from a crash such as the Great Depression crash.

One of the rules, to limit price hikes, is to require flippers to sell homes 91 days after they purchased it. The time elapsed between the purchase and the sale must be at least 91 days. The attached document, Handbook 4000.1, FHA Single Family House Policy Handbook, includes the exact rules used by lenders to know whether an FHA loan is allowed or not.

Note that the date when the property is put back on the market is not linked to whether an FHA is allowed or not. So you can put a home back on the market two months after you purchased it and someone who wants to make an offer with an FHA loan will have to wait another month to hope to grab that very house. If no one else makes an offer before then, that buyer can go forward with his offer and still obtain the FHA loan. In other words if you are a flipper and get a home ready for resale just two months after you purchased it, you won’t miss on the possibility to get an FHA buyer, only it will have to wait a little while.

But my friend told me that he sold a home he was flipping after just 60 days and the buyer used an FHA?

Possible. Indeed.

The 90 day FHA rule was waived for nearly 5 years between Feb 1st, 2010 and Dec 31st, 2014, in order to help the very large turn over of homes being flipped as a result of the 2008 housing crash.

So we are back to normal and short flips are again not allowed with an FHA loan.

Note, however, that the 12 months rule was not waived. In other words, you could buy fix and sell quickly, but you could not buy, wholesale, buy, rehab, and sell to a buyer with an FHA within 12 months (i.e. one buy/sell even within the last 12 months maximum, more than that and it’s not FHA eligible.) The idea is to avoid possibly inflated prices as we had in 2007 and earlier when many homes were just quickly traded to make money and not as actual dwellings.

Download the Waiver of Requirements of Property Flip 2010-2014 PDF document for additional details about this specific period.

There Are Other Exceptions!

Some people can benefit from other exceptions and still use an FHA even before the 90 days elapsed. It won’t remove all the rules, but at least the 90 days rule won’t apply to them.

Selling for Less

Assuming you purchased a home and end up reselling it for less than you purchased it, then the 90 days rule doesn’t apply.

Hopefully, though, this doesn’t happen too often to you! You should always look into making a profit when buying and selling homes as investments.

Relocation

When an employee gets relocated, the 90 days rule doesn’t apply.

Note that in this case the employer must be the buyer or the employee must be using the services of a relocation agency. Please contact your lender to make sure that you will be able to use this exception.

Resale by Housing and Urban Development (HUD)

The HUD is not considered to be a business selling homes for a profit. They actually help poorer people to become home owners.

For this reason, the FHA rules that the HUD can sell homes under their Real Estate Owned (REO) system at any time and still allow the buyer to use an FHA loan. However, note that some of the homes the HUD sells are considered inhabitable (i.e. contain black mold, windows do not have the right dimensions, etc.) and thus they can’t be sold through an FHA. The Federal Agencies are really big on compliance and in most cases upgrading homes is not job they undertake.

Of course, the HUD has many other rules about what they purchase and sell.

One of which is about the Presidentially-Declared Major Disaster Area (PDMDA). Homes in such an area are not affected by the 90 days rule. For example, in 2017 California had major fires in the Sonoma County and on October 10, 2017, Vice President Pence declared that it was a Presidentially-Declared Major Disaster Area. Someone who purchased a home there less than 90 days ago can resale to someone with an FHA loan. However, the HUD has to be consulted as their agreement has to be included in such a sale.

Note that for the 2017 California Wild Fire Disaster, people who lived in the affected areas also benefited from a mortgage reprieve. This reprieve gives them a 12 months period while they do not have to pay for their mortgage if they were directly affected by the fire (i.e. their home was damaged by the fire.) For the first three months, lenders could offer the reprieve automatically. No additional charges or late fees will result for this period of time.

Government Agencies and Government Sponsored Enterprises (GSE)

A government agency reselling residential properties is not bound to the 90 days rule. There are not very many houses for sale by a government agency, though.

This applies to Federal, State, and Local Government Agencies.

The reason behind this rule is the the Government is not allowed to sell homes higher than current market price, so there no risk of price hikes from Government Agencies.

Inherited Property

Someone who inherits a property is not bound by the 90 days rule. This is particularly good since the new owner may live in a different location altogether, another state or even country and having to wait for three months to sell through an FHA would be rather unfair in such a situation.

Also an inheritance is not considered to be a sale, even though in many cases some money is involved when multiple heirs inherit the property, the transfer is still not considered to be from a seller to a buyer. Also price hikes would certainly not happen in this situation It is a rare situation to have deaths back to back where such a problem would arise.

 


Following is the text from the standard
(Effective Date 09/14/2015 | Last Revised: 12/30/2016)

II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT

A. Title II Insured Housing Programs Forward Mortgages

1. Origination/Processing

(3) Restrictions on Property Flipping

Property Flipping is indicative of a practice whereby recently acquired Property is resold for a considerable profit with an artificially inflated value.

(a) Definition

Property Flipping refers to the purchase and subsequent resale of a Property in a short period of time.

(b) Standard

(i) Time Restriction on Transfers of Title

The eligibility of a Property for a Mortgage insured by FHA is determined by the time that has elapsed between the date the seller has acquired title to the Property and the date of execution of the sales contract that will result in the FHA-insured Mortgage.

FHA defines the seller’s date of acquisition as the date the seller acquired legal ownership of that Property. FHA defines the resale date as the date of execution of the sales contract by all parties intending to finance the Property with an FHA-insured Mortgage.

(ii) Restriction on Resales Occurring 90 Days or Fewer After Acquisition

A Property that is being resold 90 Days or fewer following the seller’s date of acquisition is not eligible for an FHA-insured Mortgage.

(iii) Resales Occurring Between 91 Days and 180 Days After Acquisition

A Mortgagee must obtain a second appraisal by another Appraiser if:

  • the resale date of a Property is between 91 and 180 Days following the acquisition of the Property by the seller; and
  • the resale price is 100 percent or more over the price paid by the seller to acquire the Property.

If the second appraisal supports a value of the Property that is more than 5 percent lower than the value of the first appraisal, the lower value must be used as the Property Value in determining the Adjusted Value.

The cost of the second appraisal may not be charged to the Borrower.

(iv) Exceptions to Time Restrictions on Resale

Exceptions to time restrictions on resale are:

  • Properties acquired by an employer or relocation agency in connection with the relocation of an employee;
  • resales by HUD under its REO program;
  • sales by other U.S. government agencies of Single Family Properties pursuant to programs operated by these agencies;
  • sales of Properties by nonprofits approved to purchase HUD owned Single Family Properties at a discount with resale restrictions;
  • sales of Properties that are acquired by the seller by inheritance;
  • sales of Properties by state and federally-chartered financial institutions and Government-Sponsored Enterprises (GSE);
  • sales of Properties by local and state government agencies; and
  • sales of Properties within PDMDAs, only upon issuance of a notice of an exception from HUD.

The restrictions listed above and those in 24 CFR § 203.37a do not apply to a builder selling a newly built house or building a house for a Borrower planning to use FHA-insured financing.

(c) Required Documentation

The Mortgagee must obtain a 12 month chain of title documenting compliance with time restrictions on resales.

2 Replies to “FHA 90 day Rule applies to the Insurance”

  1. Real Estate investments have always been tricky. Homes are generally more expensive per square feet the closer you get to downtown and this is not specific to Sacramento. So in such a location, you are more likely to get a place where rent won’t cover the monthly payments.

    However, in most cases you should bring between 20% and 30%, at least for your first few investment properties, in order to lower the loan payments and make sure the rent will cover it. So to give you an example, for a home worth $250,000, you should bring at least $50,000 of down payment to have a chance for the rent to work for you. Of course, if you are taking an FHA, you are not likely to have that kind of money to start with.

    One solution is to buy a first home so at least instead of yourself paying rent you pay your bank. Wait until you have over $50,000 of equity, then sell. With that equity in hands, you buy a new home and now the rent should cover the loan payments. If you purchase a new property quickly enough, you will avoid taxes (The tax offices gives us about 180 days) so you do need to plan for taxes in case your purchase doesn’t go through. It may also be possible for you to get a new loan (refinance) which buys out the old loan and reduces the monthly payment. This sounds easy, but the valuation of the home often makes this technique difficult.

    A simple trick to accelerate the time it takes to reach a $50,000 of equity is to pay the bank faster. At the start, the loan has very little principal but very large amounts of interest. If you pay 2 months every time, the second month you only need to pay the principal. So say your payments are $2,000/mo. and your currently pay around $100 of principal, by paying two months at once you pay $2,100 for that month and the next month was paid for… So you just saved a $1,900 of interests to the bank. Watch out because many loans do not allow you to do that. But imagine the saving within the first 2 or 3 years… With numbers such as $1,900 x 36… (it’s not the correct number and you have to the exact amount of principal for the following month(s); but it’s still an advantage if you can spare a little each month).

    Of course, this assumes a market which is at least stagnant, but hopefully a fairly standard +3%/year. When homes lose value like in 2008, the time to get the equity is going to take longer.

  2. Wonderful and informative article, but it didnt address a buyer who purchased, with no intention of flipping, remodeling or renting out the home, but financially thinks the payments are higher than they want to pay, especially with a baby on its way.
    What about a vet buyer who was just approved to move into government base housing, and the rents in the area are less than the house payments, and the market has not increased much since buying the home more than 90 days ago but less than 180 days, and the buyer wants to sell the home?
    Is there any reason this seller would be unable to sell to a buyer using FHA financing?
    Thank you.
    Mary Ann Weigner
    maw0602@gmail.com

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