Homebuyers who need a loan insured by the Federal Housing Administration, or FHA, may be able to buy a recent foreclosure house now that the FHA has waived its so-called “anti-flipping” rule. This rule banned the use of an FHA-insured mortgage to buy a home that was being resold within 90 days of purchase.
The rule was enacted to reduce mortgage fraud. But over time, the effect was to hinder buyers who needed an FHA-insured loan and wanted to buy a home that had been bought at a foreclosure auction and fixed up by an investor for resale. The waiver should now allow these borrowers a better chance to buy those homes.
“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” FHA Commissioner David H. Stevens said in a statement. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”
Will lenders relax anti-flipping rules?
The waiver is a positive step, but its effects may be limited, according to Peter Thompson, a senior mortgage consultant at Wintrust Mortgage in Downers Grove, Ill.
“The FHA has relaxed the rule, but we have to look at how lenders are interpreting it,” he says.
Wells Fargo has introduced its “first phase” of the waiver, which will allow qualified borrowers to use an FHA loan within 90 days of the seller’s acquisition of the property if the purchase price is not more than 20 percent greater than the seller’s acquisition cost.
Bank of America hasn’t made a decision about how to handle the waiver. A representative for J.P. Morgan Chase said the bank “appreciates any policy that allows quicker sales” of bank-owned real estate, but that the waiver “will not have a major impact.”
Anti-flipping waiver has some restrictions
Buyers should be aware of the FHA’s limits on the anti-flipping rule waiver, which are as follows:
- The home sale must be at arm’s length, which means there can be no close business or personal relationship between the seller and buyer.
- If the price that the buyer agrees to pay for the home is more than 20 percent higher than the price the investor paid to purchase it, the sale will be subject to extra scrutiny to ensure that the value hasn’t been inflated.
- The Home Equity Conversion Mortgage for Purchase program is excluded from the waiver. This program allows older homeowners to combine a reverse mortgage and a home purchase.
- The 90-day time period might be shorter or longer than 90 calendar days due to the way the start and end dates are determined. The start date occurs when the sale is recorded. The end date occurs when the purchase contract is signed.
- The waiver began Feb. 1, 2010, and will last one year, unless the FHA extends or withdraws it. The waiver can be withdrawn if there is a significant increase in defaults or mortgage insurance claims on FHA loans that were used to buy flipped homes.
Homebuyers typically don’t encounter the anti-flipping rule until they’ve found a house they want to purchase and been told they can’t use an FHA loan unless the investor has owned the home for at least 90 days. Buyers who are concerned about this pitfall should ask when the investor purchased the home, what the sale price was and whether FHA financing will be allowed.
Waiver not expected to result in fraud
The anti-flipping rule originally was imposed in 2003 to reduce mortgage fraud that involved quick resales of properties purchased through straw buyers and had artificially inflated appraisals.
The FHA granted a long list of exemptions from the rule. For example, homes sold by most government agencies and nonprofit organizations were exempt. That meant buyers who wanted to use an FHA loan could purchase those homes, but not other homes that had been bought and repaired by private investors, within 90 days. The waiver will level that playing field.
Skeptics might wonder whether the waiver could set off a rise in loan fraud. Thompson suggests that’s unlikely because the loan environment has changed since the anti-flipping rule was enacted. One change is that drive-by appraisals, which were quite common, have given way to stricter appraisals rules and that lenders now examine appraisals “with a fine-toothed comb,” he says. That should reduce the risk of fraud.
The bottom line on property flipping and fraud, according to a letter officials at the California Association of Realtors sent to the FHA in November 2009, is that “a property resold with 90 days by a legitimate investor is no longer synonymous with fraudulent or predatory practices.”
Homebuyers who need an FHA loan should be able to take it to the bank.