This guide will cover HUD guidelines on property flips and qualifying for FHA loans. Buying an older home and transforming it into a beautifully remodeled and modern version has become a popular venture in the real estate sector. Now, when you go house hunting and come across one of such homes, you will find them appealing, and you can easily decide to buy one. If you do, and you are planning to use an FHA loan to pay for it, there are a few things you need to be aware of regarding the HUD guidelines on property flips. Ronda Butts of FHA Bad Credit Lenders said the following about buying a property flip with an FHA loan.
Homebuyers interested in buying a renovated home need to understand the basic HUD guidelines on property flips because they can affect your approval for an FHA loan.
HUD has specific rules for borrowers buying a property flip with an FHA loan. To avoid surprises during property transactions, borrowers need to understand that buying a property flip is different than buying a traditional home that is not a flip. In this article, we will tell you everything you need to know about these HUD guidelines on property flips.
What Are HUD Guidelines on Property Flips?
What are HUD guidelines on property flips? In this section, we will discuss the flipping guidelines per HUD. For starters, if you plan to apply for an FHA mortgage to finance the purchase of a renovated home, you must abide by the 90-day rule. HUD guidelines on property flips states that the person selling the flipped home must be the legal owner for at least 90 days before any buyer can buy it. When it comes to flipping properties, the seller purchases a distressed property, gives it some upgrades and then sells them at a profit.
When looking for the right properties, the sellers check out foreclosures, tax sales, or even property auctions to try and find a good deal. They then allocate their investment toward the repairs and renovations in a manner that will yield the most profits. According to HUD, the parent of FHA, property flipping is the purchase and subsequent resale of a property after a short period, after renovations, to increase its value.
Qualifying For an FHA Loan on a Property Flip
When a buyer for such a property approaches FHA lenders for a mortgage, the lender will first establish whether the property has attained the 90-day rule by looking at the date the deed was recorded and the resale date, which is the date when the sale contracts were signed. The seller must provide a chain of title requirements to prove property ownership, plus any other previous transactions involving the property.
What Is HUD 90-Day Rule on Property Flips?
The 90-day rule was implemented to prevent property investors from buying properties to quickly sell them at a high price, leading to a deliberate inflating of property prices. As per the FHA guidelines, if the property is being sold within 90 days. Then the buyer won’t be able to obtain an FHA loan unless certain conditions are met. The conditions may include the following:
- The resale price can’t be more than 20% above what the seller paid for it, and
- The property has undergone significant renovations that would justify the slight price increase.
- The FHA lenders will rely on home appraisers to determine who has owned the property and for how long.
- The chain of titles will be reviewed thoroughly.
HUD Guidelines on Property Flips After The 91st – 180th day
After the 91st day, receiving FHA approval without any restrictions is easier. However, even after you purchase the property after this period, especially between 91 and 180 days, a second appraisal will be necessary and has to be done by a different appraiser when the price is more than the initial buying price by the seller.
If you are buying a property flip form a real estate investor, you will most likely need two home appraisals. However, the second appraisal cannot be paid by the homebuyer.
For instance, if you want to buy a $400,000 renovated home, and the seller has paid $200,000 for it and made some upgrades, the lender will need an appraisal to support the increase in the property’s value. The lender may also want to see documentation of the renovations to justify the increased value.
Exceptions To HUD Guidelines on Property Flips
What are some of the exceptions to the FHA flipping guidelines? Even though FHA guidelines do apply almost every time, there are a few exceptions, including:
- The resale of real estate-owned (REO) properties
- Where it is properties that are owned by the U.S Department of Housing and Urban Development, other government agencies, or Government- Sponsored Enterprises being sold
- The resale of Presidentially Declared Major Disaster Areas (PDMDA)
- If the property that’s being sold is part of the inheritance
- When it is a new construction being sold
- If the home in question belongs to a non-profit organization
- If the property being sold was acquired by the employer or relocation agency
Implications of HUD Guidelines on Property Flips
What are the implications of FHA guidelines on property flips? These guidelines affect both the homebuyers and sellers in some way. In the sections below, we will cover some of the topmost impacts on each group.
Impacts on Homebuyers
When it comes to home buyers, these guidelines were good news. Time and time again, sellers exploited many, who used to inflate property prices whenever they wanted. Angie Torres, National Operations Director at FHA Bad Credit Lenders said the following about HUD guidelines on property flips:
HUD guidelines on property flips protect the buyers from inflated prices by requiring the sellers to adhere to specific regulations when reselling their properties. This, in turn, helps to prevent fraudulent flipping practices by unscrupulous sellers, thereby ensuring the buyers are not taken advantage of.
Knowing that the property values aren’t artificially inflated, homebuyers now tend to have more confidence in the seller’s prices. This means that, even when you apply for a mortgage, there won’t be any surprises at the property transaction stage—impacts on the sellers.
How HUD Guidelines on Property Flips Affect Home Sellers
Regarding the sellers, HUD guidelines on property flips is not as beneficial as they are restrictive. When you look at the 90-day rule, the sellers can’t sell their newly renovated properties fast enough. And this can be a serious limitation, especially if, after purchasing the property, it only took a few days or weeks to fix it. Secondly, the guidelines may strain the profits as any price increment must be proven before a buyer can secure an FHA loan to pay for it.
Can HUD Guidelines on Property Flips Affect Homebuyers in a Sellers Housing Market?
In cases where the lenders put a price cap, even after serious renovations can limit the potential profit margins for sellers. And many may opt to snub buyers planning to pay with FHA loans. Lastly, at times, to justify the increased resale value, the seller must have carried out significant property renovations and improvements. This can take up much time on the sellers part and be an unnecessary expense.
Why Did HUD Implement HUD Guidelines on Property Flips For Borrowrs of FHA Loans
In conclusion, the HUD guidelines on property flips is a crucial set of regulations to protect homebuyers and stabilize the housing market. HUD guidelines on property flips was implemented to protect consumers buying a home an investor purchased cheap and flips in a short period of time with a hefty profit. However, many homebuyers may lose the opportunity of buying a property flip due to the restrictions of HUD on FHA loans. Dale Elenteny of FHA Bad Credit Lenders believes the reason HUD has implemented restrictions on property flips is the following:
Requiring sellers selling flipped properties to adhere to a specific timeframe before they sell the property prevents potential fraudulent flipping practices under the eyes of HUD.
While sellers can see the guidelines as restrictive, especially regarding their profit margin, they ensure that home prices remain fair and affordable, ultimately leading to the growth of the whole real estate sector. By promoting fairness and transparency in real estate transactions, the FHA guidelines on property flipping help create a more stable and sustainable property market for us all.
