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Friday, August 3, 2012

Flipping Houses and The FHA 90 Day Rule

I had mentioned last week that as soon as we put House #9 on the market we got two offers on it. So we quickly went under contract with that house unfortunately that was short lived. You see, since I have owned this house for less than 90 days and the buyer wants to use an FHA loan to purchase it, things get a bit more complicated with the loan approval…

HUD has this “90 day rule” where properties that have been owned less than 90 days AND are being sold for more than 20% of the price they were last purchased for have to “jump through more hoops” to qualify for a loan. I already knew about this limitation but many times the buyer, their agent and their lender do not know about this rule.


What the FHA 90 day rule says is that for properties sold in less than 90 days and for more than 20% a second appraisal will be needed, a home inspection is mandatory and I will have to provide evidence (receipts, invoices, contracts, etc.) of all the repairs and improvements I have done to the house in order to justify the increase in value.

I understand the intent here. Just a couple of years ago, so called investors were buying a house and then turning around and reselling it for 150% of what they paid even though they had done nothing to the house. This was sometimes done with the help of an appraiser and/or agent that were falsely pushing up the value of the property. There are people in jail right now for doing this…

Anyway, the thing is I have to educate the buyer, agent and lender on this rule and help them navigate through it because many lenders are not aware how to do it or even if they can do it. So sure enough the buyers lender could not do it. This was fine with me because I was prepared and offered to the buyer to use my lender, a lender I know can do FHA loans on pre-90 day properties.

I offered to pay for both appraisals and offered a longer financing contingency if he used my lender and he agreed. You see, I learned my lesson back with House #6, where the buyers lender wasted all our time for about 40 days only to find out that the buyer will not be approved for the loan

So, although I cannot require a buyer to use my lender, I encourage them to use him by offering incentives. I know the deal has a much better chance of going through if the lender knows what he is doing.

Unfortunately once he started working with my lender he quickly discovered that the buyers financial qualifications were not very strong and he would not be able to qualify for an FHA loan on a pre-90 day property. I should probably say fortunately because it is best to find this out 5 days into the deal rather than 40…

We quickly put the house back on the market and called every agent that had visited the house so far. Within 24 hours we had another offer…yippee! Once again the buyers lender could not do the loan and our lender could. Even better it seems that this buyer is much better qualified and should be able to make it through loan approval…sigh!

Now we move on to the due diligence period and they will be doing their inspection soon. That will be our next hurdle and although I know there are no major issues with the house you never know what a home inspector can come up with...




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2 comments:

  1. Luis, I am not sure I quite understand how come the buyers lender cannot do the loan for him but your can. I thought and FHA loan is an FHA loan regardless of the bank you are getting it through??

    ReplyDelete
    Replies
    1. Jake, good point and you are right, it's FHA loans regardless but some lenders set their own rules in addition to FHA rules. And what I am finding is that even though FHA allows the loan on a pre-90 day property the lenders own rules will not.

      This is kind of good and bad. Bad because the most common lenders that a buyer is likely to use like Bank of America, Citibank etc. will not do them. But good in the sense that other, smaller lenders will, so there is a way to get the house sold on an FHA loan anyway as long as I can help the buyer find the right lender, mine in this case ;-)

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