Collateral For FHA Mortgage Underwriting Guidelines
Property flipping is a practice whereby a recently acquired property is resold for a considerable profit. These type transactions are allowed if the property is not misrepresented and/or the value of it is not artificially inflated. In an effort to prevent illegal property flipping, FHA implemented the following property flipping policy:
1. Only owners of record may sell properties that will be financed using FHA-insured mortgages, Any re-sale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing, and
2. For sales that occur between 91 and 180 days, where the new sales price exceeds the previous sales price by one hundred percent (100%) or more, FHA will require additional documentation validating the property’s value.
Sale by the Owner of Record
FHA considers the re-sale date as, the date of execution of a sales contract by the buyer.
The property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This applies to all FHA purchase money mortgages regardless of the time between re-sales.
The file must include documentation verifying that the seller is the owner of record. This documentation may include, but is not limited to a property sales history report, a copy of the recorded deed from the seller, or other documentation such as a copy of a property tax bill, title commitment or binder, demonstrating the seller’s ownership of the property and the date it was acquired.
Exceptions To The 90 Day Restriction For FHA Mortgage Underwriting Guidelines
Sales by HUD of its own Real Estate Owned (REO) properties. Properties that were HUD REOs and then rehabilitated and resold are not eligible under this exemption for FHA mortgage underwriting guidelines.
Sales by other US Government agencies of single family properties pursuant to programs operated by these agencies.
Sales of properties by non-profits approved to purchase HUD-owned single-family properties at a discount with resale restrictions.
Sales of properties that are acquired by the sellers by inheritance.
Sales of properties purchased by employers or relocation agencies in connection with relocations of employees.
Sales of properties by state and federally charted financial institutions and Government Sponsored Enterprises.
Sales of foreclosed properties by state licensed mortgage lenders.
Any entity that sells foreclosed properties on behalf of an exempt lender or financial institution.
Sales of properties by local and state government agencies.
Sales of a previously foreclosed or abandoned property acquired, rehabilitated and resold by an entity using funds from and performing under agreements with state and local government agencies under a Neighborhood Stabilization Program (NSP).
Notes For FHA Mortgage Underwriting Guidelines
Documentation proving a seller is exempt from any of the property flipping guidelines is required in the endorsement file prior to approving the loan transaction.
Re-sales that occur under this exemption within 90 days of last acquisition with a sales price increase of 100% or more require a second appraisal ordered from an approved Appraisal Vendor service.
Re-Sales Occuring Between 91 Days And 180 Day Following Acquisition For FHA Mortgage Underwriting Guidelines
A second appraisal made by another appraiser ordered through the lender’s appraisal management service is required if the re-sale price is one hundred percent (100%) or more over the price paid by the seller when the property was acquired.
Example: If a property is re-sold for $80,000 within six (6) months of the seller’s acquisition of that property for $40,000, a second appraisal supporting the $80,000 sales price is required.
Documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value may be provided, but the second appraisal is still required.
The cost of the second appraisal may not be charged to the homebuyer; however may be paid by the seller.
Both appraisals must be FHA appraisals prepared by independent appraisers.
Both appraisers must be on HUD’s roster list of Approved Appraisers and be state certified with an unexpired license.
Repairs on both appraisals must be resolved.
If there is a difference in value of more than five percent (5%) between the two appraisals, the appraisal with the lowest value must be used.
The Conditional Commitment is issued based on the appraisal used by underwriting.
Re-Sales Occuring Between 91 Days And 12 Months Following Aquisition For FHA Mortgage Underwriting Guidelines
FHA reserves the right to require additional documentation to support the re-sale value if the re-sale price is five percent (5.00%) or greater than the lowest sales price of the property during the preceding twelve (12) months.
Documentation may include, but is not limited to, an appraisal from another appraiser.
Date of Property Acquisition Determined By The Appraiser
Information provided by the appraiser in compliance with the USPAP rules may be relied on to determine the seller’s acquisition date. Appraisers are responsible for considering and analyzing any prior sales of the property being appraised within three years of the date of the appraisal.
If the most recent sale of the property occurred at least one year previously, no additional documentation is required.
Any conflicts in information must be resolved and the file must be documented accordingly.
Effective through December 31, 2014, FHA has implemented a property flipping waiver for properties that have been resold within 90 days of last acquisition and do not meet the Exception to the 90-day restriction criteria detailed above. To protect FHA borrowers against predatory practices of “flipping”, where properties are quickly resold at inflated prices to unsuspecting borrowers, the waiver is limited to those sales meeting the following general conditions
All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions A second appraisal must be ordered from a Pacific Union Financial Appraiser Vendor service
The appraiser provides a detailed list of improvements made to the subject property since it was last acquired
The seller provides evidence of the increase in value thru sufficient renovation, repair, and/or rehabilitation.
The property was marketed openly and fairly via MLS, auction, FSBO or developer marketing.
A property inspection report by a licensed home inspector ordered by the broker.
Loan must be tracked as a Flipping Waiver (see program code matrix) and is subject to special pricing.
Property Listed For Sale
Eligible for Rate/Term or Streamline Refinance if listing was expired or cancelled prior to application date.
Eligible for Cash-Out Refinance if listing was expired or canceled >90 days prior to loan application date.
Condo project must be on FHA’s approved list.
No manufactured homes – not applicable on Streamlines Refinances.
No Escrow Holdbacks.
An FHA Appraisal may be transferred from another lender to current lender. Only the appraisal is assignable. The appraisal must be evaluated by current lender underwriter. The transferred appraisal:
1. May not be expired.
2. May not have been used to complete another transaction that has closed.
All files must include one of the following acknowledgements from the borrower:
1. Receipt of the appraisal at least three days prior to closing.
2. Waiver of right to receive appraisal within three days prior to closing.
Reminders For Minimum Property Requirements
Modular homes are considered real property and are eligible for financing through our wholesale mortgage lenders under the same terms as stick built homes. A steel undercarriage is used to transport modular home sections on a flatbed truck from the factory to the building site. The house sections are then permanently anchored to a foundation. Modular homes must conform to state and local building codes.
Manufactured Homes And FHA Loans
Unlike modular homes, manufactured homes are generally considered personal property, not real property, and are ineligible for financing through many of our wholesale mortgage lenders. They are permanently attached to a chassis to ensure transferability and will often have an affixed certification label (HUD tag) and data plate. Manufactured homes are not held to the same building standards as modular homes and traditional stick built homes and are commonly referred to as single wide, double wide and triple wide mobile homes.
Mixed use properties are eligible provided the non-residential use does not impair the residential character and does not exceed 25% of the total square footage.
All properties must have safe potable drinking water and sanitary facilities for safe disposal of sewage. Connection to public or community water/sewage required whenever feasible.
Individual water systems must meet local health standards or EPA standards in the absence of local standard. Evidence of water test required by local health department or a commercial testing lab or licensed sanitary engineer.
Individual sewage inspections by a local health authority may be required when appraiser indicates a problem with either the septic system, indicates the subject is located in an area with soil percolation problems or is a condition of the appraisal.
If roof is defective and has three or more layers of shingles, it must be corrected.
All mechanical, heating and electrical supplies must be adequate for the dwelling.
Property must be free of any health, safety or structural hazard that may impair the customary use and enjoyment of dwelling.
Site must be graded to provide positive, rapid drainage form perimeter of will and prevent ponding on the site.
Property may not be located in a high pressure gas, liquid petroleum or high voltage electric transmission line easement.
Any defective paint condition in a dwelling build prior to 1978 will be assumed to contain lead and must be corrected.