FHA Flip Rule: 90-Day Flip & 91-180 Day Flip
FHA loans are a popular option for homebuyers with lower credit or otherwise may not qualify for a conventional mortgage.
However, the Federal Housing Administration (FHA) has restrictions in place when buying a property that is being “flipped” by an investor. The FHA flip rule does not typically allow you to finance a home the seller has owned for 90 days or less. In some cases, the FHA flipping rule also places restrictions on properties last sold within the past six months.
Key Takeaways
The FHA flip rule exists to protect buyers from predatory selling practices.
Homes most recently sold within 90 days are generally not eligible for FHA financing.
Homes most recently sold within 91-180 days may be eligible with certain restrictions.
There are exemptions to the FHA flipping rule, including homes sold by government agencies or when ownership was recently transferred through inheritance or divorce.
What Is Property Flipping?
Residential property flipping is when a home is purchased and then quickly resold at a higher sales price. This commonly involves the flipper making improvements to the home, including:
Renovating the kitchen or bathrooms
Installing new flooring
Painting interior and exterior walls
Adding landscaping or otherwise enhancing curb appeal
In some cases, however, a flipper may purchase a property below market value from a distressed seller, such as someone facing foreclosure, that wants to liquidate an inherited property, or who has an immediate need for cash due to other life circumstances. The investor could then resell it at its actual value without making any improvements.
What Is the FHA Flip Rule?
The FHA flip rule refers to restrictions on using FHA-backed loans to buy properties the seller recently purchased. If a home last sold within the previous six months, the transaction must comply with the FHA flipping rule to qualify for funding.
There are separate guidelines for homes the seller has owned for 90 days or fewer and those owned for 91-180 days.
FHA 90-Day Flip Rule
The FHA 90-day flip rule states that buyers must purchase a home from the property's current owner of record and that they cannot have taken ownership within the past 90 days. Homes the seller has owned for 90 days or fewer are typically not eligible for FHA financing.
The length of ownership will be documented during the FHA appraisal and is calculated based on the time between when the current deed was recorded and the date that the buyer and seller entered into their sales contract.
This period must be at least 91 days, although there are still some restrictions when the current owner has had the home for 180 days or fewer.
Note: Some exceptions to the FHA flipping rule allow you to use an FHA-backed mortgage to purchase a home regardless of the current ownership period. We'll cover those scenarios a little further down in this article.
FHA Flip Rule for Sales Between 91 and 180 Days
The FHA flip rule for homes owned between 91 and 180 days allows for transactions where the current sales price is less than 100% higher than the most recently recorded sales amount.
If the current contracted price is 100% higher or greater, the lender must obtain a second appraisal that supports this increased value. The lender must also document the enhancements made to justify this increase in value, including the costs incurred by the property flipper to make the noted improvements.
FHA guidelines state that when a second appraisal is required, its cost may not be passed on to the buyer. The lender commonly absorbs this second appraisal fee. As a result, this may discourage mortgage companies from lending on transactions that fit within the 91-180-day FHA flip rule.
For Example: An investor purchased a property four months prior for $125,000 and made $60,000 worth of improvements. As it's been more than 91 days since they took ownership, a contract price of $225,000 would allow FHA financing without further issues. However, a contract price of $250,000 would require the lender to obtain a second appraisal and detailed documentation of the improvements made.
Why Does the FHA Flipping Rule Exist?
Flippers attempting to maximize their profits through a rapid resale could perform shoddy work or superficial fixes that do not address – or even cover up – underlying issues while commanding a sales price far higher than the property is actually worth.
The 90-day flipping rule is just one of the methods the FHA has implemented to prevent buyers from being victims of predatory flipping activity.
Since the 90-day FHA rule states that buyers must purchase property from the "owner of record," it also prevents purchasing assigned contracts. This is when an intermediary locks a property under contract and markets it at a higher price to the final buyer without ever taking ownership.
Exceptions to the FHA Flip Rule
The FHA flipping rule exists to protect buyers from being taken advantage of by unscrupulous flippers and investors. However, there are some situations where you can still obtain an FHA loan to purchase a property that has transferred ownership within the past 90 days.
These exceptions include:
Foreclosed homes owned by the Department of Housing and Urban Development (HUD) and other federal agencies and government-sponsored enterprises such as Fannie Mae, Freddie Mac, and the VA
Properties owned by financial institutions that are state or federally chartered
Builder-owned newly constructed homes or contracts to build a house where the builder has taken ownership of the lot within the past 90 days
Homes being sold by non-profit organizations approved to purchase HUD-owned properties
Sales by state and local governments and their agencies
Properties recently obtained by an employer or relocation agency as part of an employee relocation program
Inherited properties or homes recently awarded through court order as part of a divorce decree or separation agreement
Properties located within a Presidentially Declared Disaster Area
What the FHA Flip Rule Means for You
How does the FHA flip rule impact you? We'll break it down for the different parties to a real estate transaction, including buyers, sellers, and real estate agents.
Homebuyers
The FHA flipping rule is designed to protect you from predatory sellers and, as such, will prevent you from buying a property owned for 90 days or less in most cases. This could lead to fewer home options in some locations, particularly "hot markets" where property flipping by investors is commonplace.
Sellers/Investors
Selling an investment property you've owned for fewer than 91 days can reduce the number of potential buyers, as those who plan to use FHA financing would not be eligible to enter into a contract. This can make property flipping more difficult in locales where many purchases are funded with FHA-backed loans.
Real Estate Agents
If you're working with buyers who plan to use FHA financing, it's crucial to have a general idea of the chain of ownership of a home before submitting an offer. Properties that are an apparent flip are not inherently ineligible for purchase with an FHA loan but must meet the 90-day flip rule. Similarly, properties owned for 180 days or fewer may require a second appraisal depending on the sales price, which could delay closing or impede the transaction altogether.
If FHA Doesn’t Work, There Are Alternatives
If you’re set on buying a home that is not eligible for an FHA-backed loan due to the FHA flipping rule, you may have alternative options for financing your purchase.
Conventional Loans
Conventional loans are mortgages not backed by federal agencies like the FHA. In most cases, conventional loans will conform to the guidelines established by Fannie Mae and Freddie Mac, which do not impose the same 90-day flip rule FHA lenders must abide by.
It's worth noting, however, that conventional loans are generally harder to qualify for than FHA mortgages. You may need a higher credit score (620 or above), a lower debt-to-income ratio (50% or below), and a larger down payment (5% unless you're a first-time or lower-income homebuyer eligible for 3% down).
VA-Backed Loans
VA loans are insured by the Department of Veterans Affairs and are available to eligible veterans, current service members, and, in some specific scenarios, surviving spouses.
While the VA does not set precise credit or debt-to-income requirements, lender minimums typically include a credit score of at least 620 and a debt ratio no higher than 50%. However, buyers who do not fit within these criteria may still be able to qualify with certain lenders. VA loans do not require a minimum down payment, meaning 100% financing may be possible.
Can You Use an FHA Loan to Flip a Property?
FHA loans are designed to help buyers who may not qualify for other types of financing achieve home ownership. As such, you must plan to occupy the property as your primary residence to be eligible for an FHA-backed mortgage. Purchases intended as investments – including quick flips – do not qualify for FHA financing. In addition, you must also plan to live in the home for at least one year before selling.
However, buyers who plan to purchase a home and live in it as their primary residence while making value-adding improvements can still qualify with an FHA lender if their anticipated holding period is at least 12 months or longer.
Final Thoughts: The FHA Flip Rule Is Designed To Protect Buyers
While the FHA flip rule can prevent buyers from purchasing certain properties – particularly those owned for fewer than 91 days – it ultimately protects them from predatory investors simply looking to make a quick buck.
If you’re considering a home that does not qualify for FHA funding because of the 90-day flip rule, you may still be able to go through with the purchase by applying with a lender offering other types of mortgages, such as conventional loans.
To see what financing options you qualify for – including the monthly payments you could expect – check out currently offered interest rates and apply with a locally-operating lender today.
