I'm buying a house in Denver. Do I need to worry about the FHA anti-flipping rule? The answer to this question I am learning is much deeper than it appears. As of last year, I would have said yes, you do need to be cautious of it. Now, I would say no. But after today, I have learned that the answer is still yes. Confused yet? You're not the only one, let me explain.
For some reason that probably made sense at one point, FHA would not lend on a home that had been flipped in the past 90 days. This meant that if the current owners had bought the home, fixed it up, and immediately put it back on the market, FHA would back a loan on the house until 90 days had passed from the time the current owners bought the home until a contract was written on the house.
With so many foreclosures out there, and so many investors realizing they could make good money flipping these foreclosures, this turned into quite the problem. These investors were actually doing the market a service by buying these foreclosures, fixing them up, and helping to raise values in hard hit neighborhoods. But with the majority of buyers in the market being first time buyers, especially with the First Time Buyer tax credit in effect, most buyers were using FHA financing which essentiallyeliminated these "flipped" homes from their search.
In order to try to correct this problem, and get more of these homes sold,in February of this year, HUD put a 1 year hold on this anti-flipping rule. So until February of 2011, FHA will now lend on "flipped" homes and the 90 day waiting period does not apply. Great news, right? That is what I thought until I got a call today about a loan that is supposed to close tomorrow. Apparently there is one more condition to this new "flipping" law where the 90 days still applies.
It turns out that if the home is being flipped, and the owners are selling the home for more than 20% of what they bought it for, then you still have to wait the 90 days. And considering most investors aren't going to flip a home unless they sell it for at least 20% more than what they bought it for, this pretty much includes most flips out there. There is a way around it that requires over $2,000 in additional appraisals and inspections that have to be done upfront to prove the extra value is there. Not all lenders will do these type of loans, so it can be tricky. But if you are in my situation the day before closing, not a lot can be done.
Therefore, in a long winded way to answer the question, yes, you have to be very cautious about the anti-flipping rule if you are looking to buy a home in Denver. It is very important to speak with your lender about this if you are going FHA and that each home you consider making an offer on, have your agent investigate before hand to see when it was last sold and if it falls into the anti-flipping rule. You can still buy these types of homes, but it just requires a little more homework upfront. And if you are an investor flipping homes, make sure you disclose this to all parties upfront to avoid trouble down the line.
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