Have you ever heard of the FHA 90-day rule? Either had I until I did. If you are an investor and you plan on flipping a property you need to be aware of this rule. I would also advise all my buyers to think about this as well.
The rule states “If the last recorded deed is less than 90 days away from the new purchase contract date, the FHA lender must decline the loan.*” Supposing that the previous time you close on a property to the next time the same property goes under contract HUD will decline the loan. Let me give an example of this could work.
Say you find a property you get it under contract and you purchase it. For Flip investors, this means you plan to renovate the property. Soon after the property had been repaired to market standard you will then put it on the market for sale.
Be sure to keep in mind the time it takes to remodel the home. At the point the home is ready and active on the MLS we will need to review how many days it has been. In the case the remodel is completed quickly we can post it, however, we won’t be able to accept FHA offers.
FHA loans are very common for many first-time home buyers because it only requires a 3.5% down payment.
Assuming that we accept an FHA offer within the 90-day window we are going to have some trouble. As mentioned before HUD will not allow a buyer to purchase a property that was last closed within 90 days. Supposing that we did accidentally accept an offer here is what options there are (Which option you pick will be based on the temperature of the transaction):
Options If FHA Offer Is Accepted
- If the buyer is able to you can extend the contract until the 90th day. Then terminate the original offer and have the buyer resubmit another. The underwriter probably won’t accept the contract that was within the 90-day window.
- If the buyer wants to back out, let them back out. We would need to determine how far along we got if you want to refund their earnest.
- If the buyer wants to get into the property today and does not want to wait you can see if the buyer will get approved for another type of financing that does not have this restriction.
- Temporary lease. Of all the options this one can be the riskiest. I would advise using one of the above options before this one. A temporary lease is where the seller leases the property to the buyer until closing. After closing the property is now the buyers. (There are many ways this can go bad. the main way it could go bad is if the buyer’s financing falls apart and they damage the property.) Use this option with caution.
Additional Notes
Additionally, we have seen this go a couple of ways however you may need to get a 2nd appraisal done on the property. The 2nd appraisal will be needed IF the purchase price is 100% or more than what the seller paid for the home.* Further this applies only between days 91 thru 180.
You may also be asking “who pays for the 2nd appraisal?” I have seen and heard 2 solutions to this condition. One answer I have heard is that the buyer cannot pay for the 2nd appraisal even if they wanted to. The other answer I have seen is that the lender went ahead and paid for it themselves.
Regardless of whoever pays for it just know you should get this ordered as soon as you can. The longer you wait to order the 2nd appraisal could add even more time to this delay.
Final Point
Offering to accept FHA buyers is not necessarily a bad thing. 46%** of buyers use this type of loan so a large pool will send these types of offers. What can be a bad thing is if you don’t act accordingly whenever you are listing the property for sale. Now you know about this rule there is no reason that you should be faced with having to pick between the options presented above. We can list the property and ask that offers only be presented using the financing options that don’t have the restriction.
No matter the case the Kodiak Bear Group can get your home sold for the most value possible. When you have questions about this contact us we would be happy to speak with you.
Thank you for reading!
Sincerely, The Kodiak Bear Group
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*FHA rule https://fha.co/blog/fha-90-day-flip-rule/
**how many buyers use FHA loans https://themortgagereports.com/11726/nar-46-of-first-time-buyers-use-fha-mortgages