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FHA rule change could encourage house-flipping

A new market will soon open to people who buy houses with the purpose of fixing them up and selling them: FHA buyers.

Dani Grigg

Dani Grigg

Since 2003, house flippers have been restricted from selling to buyers using Federal Housing Administration loans for 90 days after purchasing the property. That meant some flippers would shy away from deals with potential FHA buyers, knowing they’d have to wait for that 90-day period to end.

FHA loans often serve first-time and moderate-income homebuyers, enabling them to purchase a house with a low down payment.

The FHA said Jan. 18 that the 90-day restriction will be suspended for a year, beginning Feb. 1.

One result will likely be that more investors will jump into the flipping market, buying up foreclosed homes in disrepair and rehabilitating them for a profit.

Some say this will inflate housing prices, making homes less affordable for buyers. And some say this opens up FHA buyers to scams.

But the FHA says there are rules in place to prevent predatory practices. First of all, deals must be “arms-length:” The parties in the sale can’t have the same interest.

This is designed in part to prevent homeowners from defaulting on a loan, then bringing in a friend to buy it from the bank at a rock-bottom price and return it to the homeowner at a slightly higher-than-rock-bottom price. In that scenario, the friend/flipper would make a profit and the homeowner would have a cheaper mortgage, all at the lender’s expense.

Another notable restriction prevents sellers from knocking the new price up more than 20 percent from its purchase price, unless an independent appraiser says the renovations justify that increase.

“They’ve seen enough of those abuses now over the past four to five years that they’re getting much better at identifying [predatory] transactions,” said Steve Cox, a branch manager at Boise-based Stonebrook Mortgage and president of the Idaho Association of Mortgage Brokers.

He said the rule’s suspension will help transactions move faster through the closing process, allowing more transactions to be final in time for the homebuyer tax credit, which is set to expire in June.

And he said renovating and selling houses is a “legitimate business activity, as long as they’re not turning around and making a substantial profit after beating up the bank for a low price.”

And since FHA loans have come to play an ever-more-important role in homebuying in the last two years, being allowed to sell to FHA buyers makes house flipping a lot more attractive.

About Dani Grigg

3 comments

  1. This is great news Dani. Although the 90 day rule has not held up many of my deals. FHA should just remove this rule all together. Most of the time, the 90 days falls just in time. I normally sell my homes at around 90 days or less. But I have had to push the closing date on a few. Usually though it’s 30 days rehab, 30 days on the market and 30 days to close. When I have had to extend the closing date, it has only been a week or maybe two. Great website. Thanks