FHA 90-Day Rule
Despite the fact that FHA waived their 90-day resale restriction back in 2010, there’s a lot of confusion about what can and can’t be done when selling your rehab property to an FHA buyer. I wanted to (hopefully) clarify the situation very concisely in this article.
The Old FHA 90-Day Rule
Before February 1, 2010, FHA had a very clear and very strict rule that basically said, “If you buy a property, you can’t resell it to an FHA buyer for at least 90 days after you purchase it.”
In fact, in some cases, you couldn’t even sign a contract with a buyer until after 90 days from purchase.
But, as of February 1, 2010, that restriction was waived, and FHA replace it with the following…
The Current FHA Rules
As of February 1, 2010, and at least through the end of 2012 (UPDATE: Now extended through end of 2014), FHA now allows investors to resell their properties as quickly as they want to FHA buyers. That said, there are some rules that FHA is putting in place for any quick resales. The two big ones for investors are as follows:
- All transactions must be arms-length, meaning that there must not appear to be any impropriety taking place between buyer and seller. This requirement also indicates that any prior flipping activity on the home in the previous 12 months may be a red flag to the lender.
- In cases where the investor wanted to sell within 180 days of purchase, and where the sale price exceeds the previous purchase price by more than 20%, the lender will be required to take extra steps to ensure the sale is legitimate. This may include a second appraisal and/or a full FHA inspection.
What This Currently Means in Real Life
Now that I clarified the FHA rules, let me explain how this translates into real life for rehabbers:
- While FHA will allow quick resales (as soon as you want), not all banks that do FHA loans will do them in the first 90 days. In other words, some banks still adhere to the old FHA guidelines, even though FHA doesn’t require it. There are a lot of banks that will now do FHA loans immediately, so ask around to a couple loan officers or brokers and find a bank or two that will do an FHA loan without any time restriction; most of the regional banks will do these, but even big banks like Wells Fargo are now doing them. So, just because one or two banks say no, don’t give up.
- If you plan to resell within 180 days, expect that you will need to have two appraisals on the property. Also note that the second appraisal can’t be paid for by the buyer — so either you (the seller) will need to pay for it, or the broker/lender will need to pay for it. This should be negotiated upfront so there are no surprises.
- If you plan to resell within 180, expect that the lender’s underwriter will require you to furnish details of the rehab. This may include renovation details, invoices, receipts, etc — anything to substantiate the work you’ve done.
- If you plan to resell within 180 days, you will need to do enough improvements to justify the higher resale price. There are no specific guidelines on how much work you must do, but if the appraiser or underwriter feels that you haven’t done enough work to justify the new resale value, your appraisal will likely come in low, regardless of comps.
- If there has been a “pattern of flipping” (in this case, that means there has been more than one title change other than an actual foreclosure) in the past year, the lender will likely reject the loan and you may be required to wait 6-12 months to resell to an FHA buyer. This often occurs when an investor purchases from a wholesaler, rehabs and then plans on a quick resale — there are two title changes from the wholesaler to the flipper to the end-buyer, which will be a red-flag for an underwriter, so be aware of this potential issue when buying from wholesalers.