Foreclosure investors have been frustrated by FHA mortgage loan rules prohibiting "flipping" - buying a home and then selling it within 90 days. In an effort to support real estate investors and encourage foreclosure sales, the Departmnet of Housing and Urban Development (HUD)introduced a one-year lifting of the "flipping ban" on FHA loans beginning Feb. 1.
FHA loans have become one of the primary sources of mortgage financing as credit standards have tightened, making conventional financing more difficult to obtain. FHA loans require a down payment of just 3.5% and have looser credit requirements, allowing borrowers with a credit score as low as 640 and sometimes lower to qualify for a mortgage loan.
Yet FHA loans rules have hurt the efforts of investors intending to purchase a bargain-priced foreclosure, repair it and then sell it. FHA has prohibited insuring the mortgage on a home owned by the seller for less than 90 days, so that buyers of the repaired homes have sometimes been unable to obtain financing.
The temporary waiver of the ban (from February 1, 2010 to February 1, 2011), will give FHA borrowers more access to recently foreclosed properties.
FHA researchers found that buying, rehabilitating and reselling foreclosures often takes less than 90 days. Yet restricting prospective buyers from using FHA financing to buy the homes increases the likelihood that the homes would remain vacant and vulnerable to vandalism while the owners wait for the 90-day period to pass.
The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties or propeties re-sold through private sales. The goal is to stabiize real estate prices and revitalize neighborhoods which have been hurt by high levels of foreclosures.
Certain conditions are attached to the new policy which are meant to prevent flipping practices which result in resales at inflated prices.
- All transactions must be "arms-length", meaning there are no shared interests between the buyer and seller.
- If the sales price is 20% or more above the seller's acquistion cost, the waiver will apply only if the lender meets certain conditions.
- The waiver does not apply to reverse mortgages.
FHA qualifications are set to tighten this spring and summer, with higher upfront mortgage insurance costs and higher down payments required from borrowers with low credit scores.
Written by Michele Lerner
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