Wednesday, July 30, 2008

FHA Mortgages: What Is a Flip and How Can it Affect you?

You may have heard the term “flipping” lately, especially as investors find good buys in the real estate market. What exactly is flipping, is it a bad thing and how might it touch you?

Flipping is a word that can cause many a lender anxiety. Not the traditional flip that you see in gymnastics or diving. But flipping as it pertains to the real estate and lending community. The flipping I’m talking about means buying a home for a bargain and then re-selling it quickly for profit. Sometimes huge upgrades are made to the property, sometimes not so much. But anytime someone is in the market to make money turning houses, opportunity for fraud can arise. That’s why lenders are particular and have so many rules attached to flipped homes.

Not too many years back, certain markets became inundated with fraud flipping schemes. Realtors, lenders and appraisers in these situations were all in cahoots with one another. As the saying goes, one bad apple can spoil the whole bunch. It was a very terrible thing, and the regulations we have today are reflective from that lesson learned. In particular, FHA has established strict guidelines to follow to alleviate flipping fraud on its homes that it insures.

FHA released a 90 day flipping waiver policy in reaction to the current market and buying climate. Basically, it outlines the following: FHA requires that: a) only owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) that for re-sales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s value. FHA also has flexibility to examine and require additional evidence of appraised value when properties are re-sold within 12 months.How can this policy affect you? If you are selling or buying a home that is a flip and you want FHA financing available, don’t even think about executing a contract until the 91st day. Your appraiser will note that it hasn’t been 90 days since the last sale, and immediately your FHA underwriter will read it and, in turn, reject the loan. And if on the 91st day since settlement you are buying a home that was in deplorable condition and has been fixed up nicely, you might need to get a second independent appraisal to support the value. Even if it is really apparent that it’s not the same house it was 3 months ago.

Certain properties are exempt from the rule. For instance, if HUD has foreclosed on the property, it’s not going to make itself wait 90 days to sell its own real estate. That would be kind of silly. Also, if one can show the seller inherited the property, it should be ok. And properties acquired by employers or relocation companies are kosher, too. There are a few other exemptions sprinkled about, but these are the most common ones encountered.

Basically, if you’re in the home for an FHA mortgage, just keep your ears and eyes open. Knowing your limitations upfront can make you a better negotiator and save you headaches.


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