U.S. Housing officials hope to ease the impact on communities hardest hit by foreclosures with a one-year waiver of its rule against providing FHA-insured mortgages on homes resold within 90 days.
Beginning Monday, Feb. 1, its good news for flippers – investors who acquire below-market properties that often need improvements, then quickly attempt to sell for a profit. They will now have a much larger pool of potential buyers – those first-time homebuyers or others who need the backing of the Federal Housing Administration, FHA, to qualify for a mortgage.
Homes that need minor work will likely be of high interest to investors looking to flip as many properties as possible within 90 days with the help of the waiver.
The FHA said market research has shown that “acquiring, rehabilitating and reselling these properties to prospective homeowners often takes less than 90 days.”
Prohibiting the use of FHA mortgage insurance for 90 days puts sellers in a bind. If they can’t find other buyers, then they must carry costs and take the risk of vandalism by allowing a property to sit vacant.
Cities across the hardest hit states in the foreclosure crisis – California, Nevada, Florida and Arizona – have seen portions of neighborhoods dotted with unsold foreclosure properties. The impact on communities is not easing as foreclosure cases are backlogged in many counties. In Florida, a state Supreme Court judge even issued an order recently requiring mandatory foreclosure mediations to expedite cases.
“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” said Shaun Donovan, secretary of U.S. House and Urban Development (HUD). “FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization.”
In most cases, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. The flip rule waiver will give FHA borrowers “access to a broader array of recently foreclosed properties,” according to HUD officials.
The 90-day flip rule was initiated to prevent the reselling of flipped homes at inflated prices to unsuspecting borrowers. The FHA has set up guidelines to prevent such sales starting on Feb. 1.
The FHA waver 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.
- The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
Click here for more on these waiver conditions.