Property flippers have long had tough times when it came to FHA buyers. Because of FHA's strict seasoning requirements, sellers couldn't even sign a contract with an FHA buyer within 90 days of buying the property. No contract meant no FHA loan. No FHA loan meant no sale. No sale meant no profit.
You get the idea.
Well, at least temporarily, those problems might be a thing of the past.
The Big News from FHA!
Just this last Friday, FHA greatly relaxed their title seasoning requirements. And for one year, starting February 1st, a lot of transactions are going to be exempt from their title seasoning requirements. That's potentially great news for real estate investors!
(Technically, what they've done is expanded a previous seasoning waiver. It's an interesting read, and if you'd like a copy, just email us. We'll send a copy of the actual FHA waiver to you!).
FHA's thinking goes like this: As an investor, you have an essential role to play in the housing recovery. When you buy, fix up, and then sell a property, you reduce the number of vacant properties out there. You help create a market in which homes sell quickly. You help the banks get the REOs off their books. You increase the availability of affordable housing.
These are all good things, so FHA decided to relax its 90-day seasoning requirements.
But to be exempt from seasoning, a transaction must meet two basic conditions.
The transactions must be arm's length.
To be considered arm's length:
- You must hold title to the property.
- If the seller is an LLC, Corporation, or trust, the entity must be established and operated according to state and local laws.
- There can't be any evidence of previous flipping of the property in the last year.
- The property must be marketed openly and fairly through MLS, auction, FSBO, or developer marketing. Contract assignments are a definite red flag and indicate that a transaction is not at arm's length.
If the increase in price is 20% or more, the increase must be justified.
To justify the new value:
- You'll have to document the renovations, repairs, and rehab, and the documentation must substantiate the increase in value. If you haven't rehabbed the property the appraiser must provide an appropriate explanation of the increase in value.
- The lender will also have to get a physical inspection through a third-party inspector. The inspection will be very thorough.
For properties that satisfy both conditions, the requirement of 90-day seasoning will be waived. Most rehabs take less than 90 days, and because FHA financing is often the only option open to potential purchasers, waiving title seasoning for legitimate property flippers can be a good thing indeed.
Now, if FHA decides that there is a significant increase in mortgage defaults and insurance claims tied to this easing of title seasoning, then the waiver can be withdrawn before it expires next year. But in the meantime, for investors who buy, rehab, and sell residential real estate, this is fantastic news from FHA.
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