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The FHA 90 day flip rule

To understand it you have to go back to 2003 when HUD provided Mortgagee letter 2003-7 to combat predatory practices known as "Property Flipping".

On May 1, 2003, the Department of Housing and Urban Development published a final rule in The Federal Register amending the mortgage insurance regulations to prevent the practice of flipping on properties that will be financed with Federal Housing Administration (FHA) insured mortgages. 

Property flipping is a practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.  These changes to existing credit policies, in effect for all mortgage loan applications signed on or after June 2, 2003, will eliminate the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs and, thus, preclude home purchasers using FHA financing from becoming victims of predatory flipping activity. 

Because so many of the homes that are valued within FHA limits are foreclosures and have been owned by the seller within the last 90 days many first time home buyers with FHA financing are turned away because of this 90 day flip rule. The bank does not want to have to wait a mandatory 90 days before allowing the home to close escrow.

Acting on the necessity to reduce foreclosure inventory HUD has agreed to lift this ban starting February 1, 2010 for a total of one year.  However there are some restrictions to protect buyers from predatory practices.  For homes purchased for more than 20% of the sellers aquisition price, a waiver must be obtained.  No reverse mortgages and parties in the transaction must be arms length.  You can read more about this new rule at HUD's pressroom.

This should have a significant impact on foreclosure sales in helping to reduce inventory.  However keep in mind that some lenders may have credit overlays (company underwiting policies that reject the new law) that prohibit properties be purchased using FHA financing inside of 90 days.  Your loan officer should know which lenders have such credit overlays before prequalifying a buyer(s).

Home loans since 1977

  First Priority Financial is licensed by the California DRE # 654852  Nevin's California DRE license 016552

  The opinions expressed in this blog are not necessarily those of First Priority Financial.

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