The FHA anti flipping rule is back after a four year hiatus. In January 2010, FHA waived a rule that required sellers to own a property for 90 days prior to a borrower obtaining an FHA loan on that property. The original plan for waiving the rule was to temporarily stimulate the depressed real estate market by encouraging short term real estate investors, sometimes referred to as flippers, to purchase, renovate and quickly resell properties. But as the real estate market remained in the doldrums, FHA extended the 90 day anti flipping rule waiver for several more years. Starting January 1, 2015 though, the waiver time period has ended and FHA officials have indicated no interest in further extending it.
FHA loans are very popular among first time homebuyers and prospective home purchasers who don’t have large down payments or ideal loan applications. Although FHA doesn’t originate mortgage loans, they do guarantee mortgages originated by banks and mortgage companies. FHA loans only require a 3.5% down payment and have more relaxed underwriting requirements than most conventional mortgages. For example, when a borrower has a student loan in deferment, FHA underwriting guidelines do not require that the future monthly payment of that student loan be added into a borrower’s debt to income ratio whereas conventional mortgage underwriters do.
The reduced barriers to entry have made FHA loans extremely popular. Nearly 25% of all home loans originated this year in the United States were FHA loans. Many real estate investors have discovered that an even larger percentage of the houses they try to sell attract FHA borrowers because most investors buy and fix up houses in the price range that FHA buyers purchase properties. FHA loans have max loan limits depending on area and higher end houses do not qualify. The sweet spot tends to be starter or first time homebuyer homes.
What effect will the end of the FHA anti flipping rule waiver have on real estate investors? It would have been far more significant had Fannie Mae not recently announced a 3% down loan option. But still, removing FHA buyers from being able to purchase a property from a house flipper until he/she has owned it for 90 days will, at the very least, reduce the number of prospective buyers. Further, FHA buyers tend to pay slightly more for properties then conventional buyers so if an investor wants to sell quick (within 90 days of purchase), they may be able to secure a conventional buyer but take a small discount to what they would have received from an FHA buyer.
The other fall out will be that FHA buyers will not have as many purchasing options as they have had the past 4 years. The FHA anti flipping rule has always created controversy within the real estate investing community because of this. Their argument has been that regardless of what a property was purchased for, the value of that property is established by an appraiser and not what a shrewd investor was able to buy it for a day, a month or three months prior. Meanwhile, banks that foreclosure upon properties don’t have to follow this same rule that independent investors do. Bank REOs can be sold within the first 90 days to an FHA buyer. Such a clear double standard is the result of banks having plenty of money to lobby in Washington whereas real estate investors are not organized and therefore have historically had no say in Washington or law making.
The FHA anti flipping rule is back and there are no immediate future plans to change it.
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