House flipping has quickly become a favorite strategy for real estate investors, blending the purchase of undervalued properties, strategic renovations, and a swift resale for profit. This approach offers an exciting investment opportunity, turning neglected houses into stunning, move-in-ready homes while delivering substantial financial gains.
Yet, for buyers relying on FHA loans to purchase a flipped property, the process can present distinct challenges. FHA loans, backed by the Federal Housing Administration, aim to make homeownership accessible for low-to-moderate-income buyers.
However, their government-backed nature comes with specific rules and restrictions designed to promote fairness and stability in the housing market. One such regulation is the FHA flip rule, which buyers must carefully navigate when considering newly renovated homes.
What is the FHA 90-day flip rule?
The FHA 90-day flip rule is a safeguard designed to prevent FHA financing for properties resold within 90 days of the seller’s acquisition.
In simple terms, If a property has been bought, renovated, and re-listed within 90 days, buyers using FHA loans cannot purchase it.
How the FHA 90-Day Flip Rule Works
The 90-day rule applies whether a home is receiving a major overhaul or minor cosmetic touch-ups.
Let’s say an investor purchases a rundown property at foreclosure for $120,000, undertakes a complete transformation with new flooring, updated appliances, and modern finishes, and lists it for $250,000 just 45 days later. A prospective buyer, excited by the fresh upgrades, applies for an FHA loan, only to hit a roadblock because the 90-day flip rule prohibits financing in this timeframe. In this case, the buyer must either wait until the 91st day or consider alternative funding options.
Another example involves a seller who buys a property at auction, gives it a quick facelift with minor improvements like fresh paint and landscaping, and lists it after 70 days at a modest price increase. Despite the limited updates, the FHA 90-day flip rule still applies, blocking buyers using FHA loans from proceeding until the waiting period passes.
FHA Flipping Rules for Sales Between 91 to 181 Days
Once the 90-day window has passed, FHA financing becomes an option, except with a few conditions. For properties resold between 91 and 181 days, additional FHA flipping rules may apply if the property’s resale price increases significantly from its original purchase price.
For instance, if the resale price exceeds 100% of the original purchase price, the FHA may require additional documentation to justify the value increase. This could include a second independent appraisal (in addition to the FHA appraisal) or proof of significant renovations that added value to the property.
These extra requirements protect buyers from overpaying for properties and ensure that the higher resale price aligns with the home’s market value.
The Purpose of FHA Flip Rules
The FHA flip rules protect buyers, sellers, and the broader housing market. The Federal Housing Administration implemented this rule to fight speculative and predatory practices that can artificially drive up home prices and disrupt market stability.
By requiring a waiting period, the rule helps ensure that resale prices align with genuine market conditions rather than inflated values created by quick-turn resales. This protects buyers from overpaying and reduces the risk for lenders, creating a fairer and more transparent housing market.
While the 90-day flip rule can frustrate eager buyers, it serves a larger purpose. By implementing these guidelines, the FHA aims to foster fair practices and safeguard long-term property values.
FHA Flip Rule Exceptions
Not all property sales fall under the FHA flip rule. Several exceptions allow buyers and sellers to bypass these restrictions:
Sales by government entities: Properties sold by HUD, the Department of Veterans Affairs (VA), or other government agencies are exempt from the FHA flip rule.
Non-profit resales: Homes sold by approved non-profit organizations for affordable housing purposes are not subject to the 90-day or 91-to-181-day rules.
Inherited properties: If a property is being sold as part of an inheritance, the FHA flip rule does not apply.
These exceptions provide flexibility for buyers and sellers in specific situations, making it easier to navigate FHA requirements.
Alternative Loans You Can Use to Buy a Flipped Home
If FHA flip rules stand in the way of your dream project, don’t worry! There are alternative financing options that might work better for you. With the right plan, you can still purchase a beautifully renovated property without FHA restrictions holding you back.
Conventional loans don’t enforce strict flipping rules like FHA loans, giving you more flexibility. While they often require a higher credit score and a larger down payment, they’re a solid option if you meet the qualifications.
VA loans are a great choice for eligible Veterans and active-duty military personnel. With no flipping restrictions, favorable terms, and often no down payment requirement, they provide an excellent path to buying a flipped home.
For those with the means, cash purchases bypass loan restrictions altogether, offering a seamless and faster transaction.
Each option has its benefits, so consider your financial situation and goals. By staying informed and exploring alternatives, you can confidently navigate FHA flip rule challenges and find the perfect property. Sometimes, it just takes a little creativity!
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
