FHA 90-Day Rule


69 comments

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:

  1. 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.
  2. 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.





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New HUD Lending Rules. 90-Day Seasoning, Etc... | Craig Fuhr
March 15, 2010 at 1:32 pm

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1 Ruth Holdridge March 18, 2013 at 4:31 pm

This is the story……the realtor who had the short sale listing sold it to a person…who then backed out of it in 2 days. So the realtor stepped in and bought the house….paid cash for it. Then put it on the market . My daughter loved the house… and he took her offer.. he made a big profit. He wants the closing done in May, so that would be 60 days. This might be all legal…I would like to know. He was not my daughter’s realtor that showed her the house. This all took place in about 4 days. Thanks.

2 J Scott March 18, 2013 at 6:22 pm

Hey Ruth,

This would only be legal if the agent disclosed to the bank that he was going to buy the short sale he was listing. If he purchased it in a business entity or trust and didn’t disclose his ownership of the buying entity, he committed fraud. You can ask him, but he’s unlikely to tell you if he defrauded the bank.

Regardless, if your daughter doesn’t know about any of that, she should be safe.

3 ESTEBAN April 12, 2013 at 5:50 pm

WHAT WILL HAPPENED IF A SECOND APPRAISAL IS ORDER AND THE SECOND OPINION OF VALUE IS LESS. DO THE SELLER HAS TO REDUCE THE PRICE EVEN THOUGH THE REAL MARKET VALUE IS THE ONE ON THE FIRST APPRAISAL. WHAT IF THE SELLER THEN DECIDE TO WAIT THE 180 DAYS TO SELL, THE HOUSE AND THEN SELL IT FOR THE MARKET VALUE ON THE FIRST APPRAISAL BECAUSE THERE IS ANOTHER BUYER WILLING TO PAY THE ASKING PRICE.

4 J Scott April 12, 2013 at 8:35 pm

Esteban,

If there are two appraisals, the lender will use the lower of the two. So, if the second one comes in lower than the first, the lender will use whatever the value was on the second one.

If you wait 6 months and go to sell to another FHA buyer, they will do a new appraisal, and the lender will use the value from the new appraisal.

5 John McDaniel April 22, 2013 at 11:57 pm

Help! I am currently in escrow purchasing a new home. The property title was transferred on September 25, 2012 and our purchase contract was signed on March 19. When the title was transferred on September 25, the property was dirt. There was no home on it. The builder began construction after September 25. Now our lender is claiming this is a filpped property because the date of title transfer to the date of the signed pruchase contract is less than 180 days. Here’s my question, can new construction be considered a flipped property? As a result of this, the lender is requiring a second apprasial and raising our closing fees.

6 Chris Zalupski May 20, 2013 at 7:07 pm

No. New Construction is exempt from Property Flipping Guidelines, as the previous sales price was not based on the improved property with the home on it. FHA is very clear about this, but I’ve heard of lender’s making this mistake before.

Exceptions to the 90 Day Flipping Guidelines
The following exceptions to the 90 day flipping guidelines are still applicable and remain unchanged from previous guidelines:
? Builders selling a newly built home

There are other exceptions, but this one is just about the easiest.

7 J Scott May 20, 2013 at 7:33 pm

Thanks for the info, Chris!!!

8 Judy Xiong June 13, 2013 at 7:12 pm

I put in an offer on a property that falls under the FHA 90-Day Rule and was not advised by my lender/loan officer that there would be 2 appraisals done on the property I was purchasing an, do I have any legal recourse since he didn’t advised me of the 2 appraisals being done regrdless if I asked for a 2nd one or not? This is what happend, I put in an offer on a property that the seller counter offer requesting that I used a specific loan officer to do my loan. I accpeted the counter and agreed to work with his requested loan officer. When the first appraisal came out about one week after the appraisal was requested, the appraied amount was our offer amount but with items that the property didn’t have. I disputed the appraised amount and the incorrect items listed for the property and my loan officer stated that we can ask for another appraisal on the property if I want which the seller will pay for. I agreed but then changed my mind afte speaking to my real estate agent about what might happen if the 2nd appraisal comes in at a lower amount. I advised the loan officer to cancelled the request for 2nd appraisal since I really wanted the property and only wanted to make sure that the items listed in the appraisal report was correct, the loan officer said not to worry about the amount and he can work with the seller regarding it if the 2nd appraisal came back at a lower amount so we proceed with the 2nd appraisal, which was supposely going to take another week before we received the report back. On 6/10/13, teh 2nd appraisal was emailed to me with an appraised amount of about $24k less than the 1st appraisal report that he sent to me. I reveiwed the report and found that the items listed in this report contained items that were in the property and they were the correct items such as the property having a swamp cooler for air conditioning and also noticed that the dates on both reports were one day apart from each. They were both requested prior to my request for 2nd appraisal and the lower appraisal report was signed and reported the day before the higher appraisal and way before 6/10/13. The seller refused to sell the property to me at the lower amount and when I confronted the loan officer about the dates on the appraised report, he stated that the reason why it took the lower appraisal report longer was because it had to go through auditing…now, I never heard of such thing before…Long story short, the seller will not sell the property at the lower amount and still till today’s date have not sent us the cancellation notice and it’s been 3 days already. Do I have any legal recourse on the seller and loan officer?

9 J Scott June 13, 2013 at 9:50 pm

Hi Judy,

First, I’m not an attorney, so I can’t give legal advice. But, everything you’ve stated sounds about right to me. There do need to be two appraisals in this situation, and they are generally ordered pretty close together, and if an appraisal comes in low, it will generally spend several days in an auditing process by the lender. So, all that is reasonable.

Unfortunately, you don’t have any recourse with the lender or the seller. While they should have told you the second appraisal was required, there’s no law that says they have to. The big issue is that the seller has to pay for that second appraisal, so hopefully they didn’t ask you to pay for it.

The seller should keep in mind that they won’t be able to sell to an FHA buyer for above that low value for 6 months now, as that appraisal will stick with the property. Perhaps you can remind the seller/lender of that and see if they’re willing to negotiate at all?

10 Aaron Garth July 1, 2013 at 11:31 am

J,

I’m in town on vacation from Afghanistan and was wondering if I could meet with you for coffee or a meal on me to pick your brain a little. I’ve read your book and have ventured out on a few projects my self and would like the chance to set down and talk to you. I leave back out on the evening of July 8th. Your time would be appreciated. Thank you

11 Chris P. July 30, 2013 at 5:39 pm

I have a friend who has the cash to purchase my dream home at the county courthouse steps. I’m friends with the homeowner that went bankrupt. If my friend wins the auction for the foreclosed property, how long would a lender require me to wait until I can close on this house? Someone told me that the lender may want to wait a 6 month waiting period to confirm the seller (my friend) owns the property out-right. Does anyone know how this works in Georgia?? thanks in advanced!!!
Chris

12 Diana R September 4, 2013 at 9:35 am

Hi,

I’m under contract with a house that fall under this guidelines but now the seller came back and said that he won’t pay for the second appraisal. What can be done about it? Would this be a breach in contract?

13 J Scott September 4, 2013 at 6:15 pm

Diana,

The Seller isn’t required to pay for the second appraisal, though you’re not allowed to pay for it (buyer is only allowed to pay for the first one). That said, you’d think the seller would want to in order to get the property sold. Perhaps your lender will pay for it (this is fairly common) or perhaps the seller’s agent will pay out of their commission?

14 J Scott September 26, 2013 at 4:29 pm

Hi Chris,

6 months is typical for a lender to require a purchase to be “seasoned” before they do a refi. Some lenders require 1 year.

15 Debi January 21, 2014 at 11:03 pm

Do you know of any new FHA rule about flipping that would require a flipper to own a property 12 months before a buyer could purchase the home with an FHA loan? It has been several years since we have flipped, but are hearing this new rule went into effect in January 2014. We cannot find info anywhere.

16 J Scott January 22, 2014 at 9:03 am

Hi Debi,

This is most certainly not the case. For more information, see my post here:

http://www.123flip.com/education/fha-90-day-rule

And note that this waiver has now been extended through December 31, 2014, so the same rules are in effect for at least this year as well:

https://www.federalregister.gov/articles/2012/11/29/2012-28918/federal-housing-administration-fha-temporary-waiver-of-fhas-regulation-on-property-flipping

17 T. Sloan March 26, 2014 at 11:48 pm

as a wholesaler how long do you have to hold on to the REO property before you sell it to your cash buyer??

18 J Scott March 27, 2014 at 8:29 am

Hey T. Sloan,

It will depend on who you’re buying the property from and in some cases, how much you’re selling it for. If you’re purchasing a FNMA Homepath property, you can resell immediately for less than 20% above your purchase price. More than 20% and you have to hold for 90 days. Some other REO sellers have restrictions as well — but they’re less common than the FNMA restriction.

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