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FHA will continue to finance “House Flips”. . . Boon for real estate investors

For the second year in a row, the Federal Housing Administration is extending a temporary waiver of its “anti-flipping” rule, meaning homebuyers relying on FHA-insured financing will continue to be able to buy homes that have changed hands in the last 90 days.

The waiver is a boon for investors seeking to rehab and flip properties, because it expands the pool of eligible borrowers to include those relying on FHA-backed loans, popular with first-time homebuyers and others who lack the cash to make large down payments.

In extending the waiver through 2012, FHA said all transactions must continue to be arms-length. In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will apply only if the lender can document the justification for the increase in value, FHA said.

FHA instituted the anti-flipping rule in 2003 to protect its mutual mortgage insurance program from losses on homes that were merely flipped, rather than rehabbed.

This is part of FHA’s effort to help stabilize home values and improve conditions in communities experiencing high foreclosure activity. Homes repossessed by Fannie Mae, Freddie Mac, and state- and federally chartered financial institutions were exempt from the rule.

Terms of the existing waiver will remain in place. All other terms of the existing Waiver will remain the same, including conditions to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers.

Compliance with the anti-flipping waiver requires

  1. All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
  2. In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the lender must meet specific conditions and document the justification for the increase in value.
  3. The waiver does not apply to the Home Equity Conversion Mortgages (HECMs)

In extending the waiver through 2011, FHA said it insured 21,000 90-day property flip loans worth more than $3.6 billion in 2010 that would otherwise not have qualified for financing.

That number has since grown to nearly 42,000 mortgages worth more than $7 billion on properties resold within 90 days of acquisition.

SOURCE: FHA (Federal Housing Administration)