The Various 90-Day Restrictions
UPDATE FOR JANUARY 1, 2015: If you read the article below, you’ll see that back in 2010, FHA waived the 90 Day Rule. But, as of January 1, 2015, the 90 Day Rule is back in effect. In other words, there is no longer a waiver and any resale to an FHA at this time will require the seller to have held the property for at least 90 days before resale. The FNMA Deed Restriction is unchanged as of this writing (i.e., it’s still in effect).
I’m writing this article because there seems to be a lot of confusion out there about the “90 Day Restriction” that investors tend to worry about. The reason for the all the confusion — in my opinion — is that there are actually two very different 90 day restrictions, and most investors don’t know the difference.
So, here it is…
FHA 90 Day Flip Restriction
This is the 90 day restriction (also known as the “90 day rule”) that I’ve written about several times on this blog. For many years, FHA put a restriction on BUYERS that basically said, “We will not provide you a mortgage on a property until the Seller has owned the property for at least 90 days.”
So, if you were selling a property, and wanted to sell to a Buyer who was getting an FHA loan, you’d essentially have to wait until day 91 to close on the sale (and many underwriters would actually make you wait until day 91 to write the contract and start the loan process!). Since many investors focus their sales to FHA buyers (generally, first-time homebuyers), this meant that you’d need to figure in at least 90 days into your hold time, and often closer to 150 days when the buyer needed to start the process on day 91.
Back in January of 2010, FHA waived that rule, and as of today, Buyers can get FHA loans within 90 days of the Seller purchasing the property, though it generally requires some extra hoops on the part of the Seller (for example, two appraisals). So, for all intents and purposes, the FHA 90 day restriction is no longer in force, though it certainly could be reinstated at some point in the future.
A couple takeaways here:
- The 90 day flipping rule has been waived for a couple years now, and many lenders will now lend to FHA Buyers who are buying a property that has been owned by the Seller for under 90 days. This means that not only can the property be put under contract within the first 90 days, but the actual closing can occur within that 90 day period as well. For reference, the shortest time period I’ve been able to resell to an FHA Buyer after purchase has been 61 days, as that’s how long it took to rehab, list, get a contract and get the Buyer through the loan process.
- While many lenders will now do FHA loans within 90 days, not all of them will. Despite the fact that FHA allows them to underwrite these loans, many of the big banks still won’t — I don’t know if there is a good reason they won’t, but they won’t. Oftentimes, your best bet in finding a lender who will do an FHA loan for a property that has been owned for less than 90 days is to work with a smaller local or regional bank or to find a mortgage broker who works with a variety of banks and can find one that will do this.
- In my experience, many old school mortgage brokers don’t know that this rule has been waived — especially those loan officers at the large banks who won’t do these loans. They will swear on a stack of Bibles that it’s still “illegal” and that you won’t be able to find a lender to do this, but given that I’ve now helped get nearly a dozen of these loans for my Buyers over the past two years, I can promise you that it’s not only possible, it’s not that difficult.
Fannie Mae 90 Day Deed Restriction
This is the 90 day restriction that some REO sellers (most notably Fannie Mae and Freddie Mac) impose on SELLERS (buyers of their properties) that basically says, “When you purchase an REO from us, you are not allowed to resell it to anyone else for more than 20% above your purchase price for 90 days.
There are two parts to this restriction that basically plays out like this:
1. As a buyer of the property, you may resell within 90 days of purchase, as long as your resale is no more than 20% above what you purchased the property for. For example, if you purchase a property from Fannie Mae for $50,000, you are allowed to resell it within 90 day for up to $60,000). The 20% threshold doesn’t change by making repairs or anything else — in other words, in our example above, it doesn’t matter if you spend $20,000 in repairs and plan to spend $10,000 more in commissions, you can still only resell for up to $60,000 in the first 90 days.
2. As a buyer of the property, you may resell for any amount after 90 days from your original purchase. So, if you wait until day 91, you can turn around and resell the property without restriction on price.
There are a couple nuances to be aware of with this 90 day restriction:
- The restriction is what is known as a “deed restriction,” which means that it’s actually written on the deed to the property when you purchase it. In other words, if you try to sell for above 20% within 90 days, the closing attorney will likely refuse to close the deal based on the restriction he sees on the deed. And even if the attorney were willing to close the deal, no title insurance company would insure the title within these 90 day period. So, there’s no “honor system” with this rule.
- Because the restriction is literally on the deed, it applies not only to you as the original buyer, but also to any secondary buyers as well. In other words, using our example above where you purchase a Fannie Mae property for $50,000, if you were to sell it to someone else for $55,000, they could still only resell it with the 90 day period (from the time of the original purchase from Fannie Mae) for $60,000. There’s nothing stopping them from selling it for less than $60,000 — and there’s nothing stopping lots of additional sales for less than $60,000 — but if anyone wants to sell for more than $60,000, they’ll have to wait until 90 days after your original purchase.
- Unlike the FHA restriction that often would not allow you to even get the property under contract within 90 days, this restriction only says that you can’t resell the property for 90 days. So, there is nothing stopping you from finding a buyer and putting the property under contract to resell the same day you purchase it…you just have to wait 90 days to actually complete the sale
- The Fannie Mae deed restriction also says that you can’t “encumber” the purchased property for more than 20% above the purchase price for 90 days either. In other words, if you purchase the property for $50,000, you would not be allowed to get a loan against the property for more than $60,000 for at least 90 days. This can certainly impact investors who get “rehab loans” that provide both the purchase funds and the rehab funds, as it wouldn’t allow the total loan to be more than 20% above the actual purchase price.
- While Fannie Mae and Freddie Mac are the largest REO sellers to impose this 90 day deed restriction, they’re not the only ones. Some other banks also impose these restrictions on REO sales, and one or two banks are now imposes restrictions on short sales as well (though 30 days are more common on short sales). So, make certain that you read any addendum provided by the REO seller to determine if you’ll be subject to a restriction on resale.