On January 15, 2010, HUD issued a news release which dramatically changes its 90 day anti flipping rule, which will help Orange County first time home buyers using FHA financing. The 90 day no flipping rule has prevented Orange County home buyers from purchasing a property that had been recently purchased by an investor for profit.
What was the Purpose of the No Flipping Rule?
In 2003 HUD came up with the No Flip rule in order to prevent investors from artificially inflating prices, thus ripping off unsuspecting home buyers. But in the current market the rule has been seen as a road block to the housing recovery. With all of the new consumer protection rules that have gone into place in the past 12 months including HVCC, which takes the appraisal ordering out of the hands of the lender, it would be difficult for a property to be sold for more than it can appraise.
The No Flip rule did allow for homes to be sold in less than 90 days if they had been foreclosed on and then sold by the foreclosing bank. But if an investor bought the property in order to resell for profit, then a contract to purchase could not be signed until the 91st day after the seller acquired the property.
Why Has FHA Decided to Lift the Ban on Flips?
FHA has found that in todays market, properties are being purchased, fixed up, and resold in less than 90 days. The No Flip rule prevented sellers from accepting offers from FHA borrowers. Because of the restriction, FHA borrowers have been unable to purchase many affordable homes. The waiver of the No Flip rule will take effect on February 1, 2010 and remain in place for 12 months. There will still be certain rules in place to protect home buyers.
What Conditions Need to be Met?
There are conditions that need to be met in order for FHA financing to be possible on a recently flipped property.
- All transactions must be arms-length, with no identity of interest bewteen the buyer and seller or other parties participating in the sale. This means the lender will need to make sure the seller holds title to the property. The lender will need to make sure that an LLC or Corporation which holds title to the property was established and is operated lawfully. The lender will verify that there is no previous pattern of flipping activity over the previous 12 months by checking the chain of title. The lender will also need to verify the property was marketed openly, such as on MLS, or For Sale by Owner. A red flag would be if the wording "assignment of contract of sale" appears in the purchase contract.
- The new sales price cannot be more than 20% above the price the seller/investor paid for the property. If it is, then additional conditions will need to be met.
- The waiver is only for forward mortgages. This does not apply to the HECM, or Reverse Mortgage.
What if the Property is Sold for More than 20% of the Sellers Cost?
If a property is sold for more than 20% of the sellers cost, additional conditions need to be met. The lender will need additional documentation, and may require a second appraisal, which verifies the seller has completed legitimate renovation or repair on the property which will support the increase in value. In situations where there was no rehab work, the appraiser will need to explain the increase in property value since the previous title transfer. Also, the lender will need to order a Property Inspection and provide a copy of the report to the new home buyer prior to closing. The Property Inspection need to be ordered by the lender, and paid for by the lender, although the cost can be passed on to the buyer.
Who Will Benefit from This in Orange County?
Both real estate investors and home buyers will benefit. Homebuyers, especially Orange County first time home buyers who tend to use FHA financing because of the low down payment requirements, have had limited housing inventory to choose from over the past 12 months. This rule waiver will open up a segment of the market that was previously unavailable to them.
Of course, the first thing an Orange County First Time buyer needs to do is check into how much of a loan they will qualify for. They need to contact an Orange County FHA Lender who can walk them through the initial steps of getting Prequalified and/or PreApproved for an FHA loan. Knowing how much home they can afford based on their income, or payment comfort level, is important in order to prevent wasting time by looking at homes that are out their price range.
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