Recent guidelines changes have occurred in regards to flipping a home, where as an investors purchases a home, and tries to re-sale it with in a specific timeframe, and makes a profit.
We have all seen the commercial on TV or Radio, or have been to one of those “Airport Seminars” that teach people how to flip homes. Or people have seen TV shows on how to Flip Homes.
For the borrowers and Realtors, there are specific lending guidelines which must be followed in order for a home to close smoothly. In this article I will discuss each type of the most popular loan programs and how flipping affects them. I will also give some suggestions for people who are currently flipping homes or are thinking about flipping homes.
The most common loan for a home buyer is the Federal Housing Authority or FHA loan. This is a popular loan because it only requires the borrower to come in with 3.5% for the down payment and can have the seller pay for pretty much all of the closing cost.
FHA will not allow for a borrower to go under contract for a home, if the existing investor/seller has not been on title for 90+ days, I always tell people 91 days. This can be researched speaking with a Title Company, and seeing when the investor/seller when onto title and that title was recorded. Then you will literally need to get out your calendar and count 91 days.
FHA does not, under any circumstance, allow for an exception to this rule.
When you do go under contract, between 91 days and 180 days, FHA does allow for the lender to add on additional rules or layers. We are typically seeing lenders requesting a 2nd appraisal, which cannot be paid for by the borrower, has to be paid by the seller. In this circumstance, make sure that the 2nd appraisal is NOT a FHA appraisal, FHA appraisals typically cost $100 to $150 more than a conventional appraisal.
A VA loan or Veterans Administration loan, for Military Service men/women is an awesome loan, it allows a qualified Veteran to get 100% financing on a home, and can be utilized over and over. Here is a link for more information about VA loans.
The VA allows for a property to be flipped by an investor/owner within 90 days of being on title. But once again, the VA allows the lender to add additional layers onto requirements. Typically, we are seeing that if the sellers are making more than 20% gross profit on the home, the VA underwriter will ask for a 2nd appraisal, which, again, the borrower cannot pay for, must come from seller’s funds.
Rural Development or RD loans are financed by the United State Department of Agriculture, and are limited to income and geography, but are 100% financing, so no down payment required, follow the link here for more information about USDA RD loans.
RD loan actually follow VA loan guidelines, pretty much word for word, and include the opportunity for underwriter to request a 2nd appraisal.
Conventional loan is a loan purchased by Fannie Mae or Freddie Mac, and typically require a minimum of 3-5% down. Fannie & Freddie are extremely vague when it comes to their flipping rule. Their actual rule is: “The lender is responsible for ensuring that the subject property provides adequate collateral for the mortgage. Fannie Mae requires that the lender obtain a signed and complete appraisal report that accurately reflects the market value, condition, and marketability of the property.”
What does this mean for the borrower, well each lender interprets this vague phrase differently, but here is what we are seeing in the Market:
-If seller has not been on title for <90 days, and they are making a gross profit of >20%, then some lenders will not do the loan. Other lenders will require 2 appraisals.
-If seller has been on title >90 but <180, making >20% profit, 2 appraisals will be required.
-After 180 days, no requirements.
For all transaction, VA, FHA, RD or conventional, the investor/seller needs to prove they are on title and for the specific timeframe necessary for each program. Proof of this will be required via:
- Copy of recorded Deed, Mortgage, or Trust.
- Property tax bill or tax assessment notice.
- Title report.
- Title commitment or binder
- Property sales history.
During the “Great Recession” a significant number of scams were being utilized, where as investors would acquire properties by mis-leading naive homeowners, never take title, and flip the home. This has caused lender to ask for significantly more documentation.
For a borrower and a buyer’s agent, it is critical to ensure that you are getting all the information regarding a home, through internet resources, typically provided by Title Companies, you are able to research a home in matter of minutes, and save lots of heartache down the road.
For investors/sellers and listing agents, some simple steps can also ensure a smooth transaction:
- In your listing book, have the recorded Deed of Trust or Warranty Deed available for potential buyers. This will also help in calculating day owner has been on title.
- If the sale/purchase of the flipped home was not published in the local MLS, have proper documentation of the investor purchasing the home.
- As soon as the investor take ownership of the property, take “before” pictures, do the renovations and then have “after” pictures available to the appraisers.
- Create a binder with copies of all receipts and list renovation completed on the property. Have these copies available for the appraiser and also have the ability to send to the loan officer/underwriter.
Flipping a home is a great way to make some very good money, but like all investing, there is risk involved. Mitigating this risk by having property documentation and knowing/understanding current underwriting guidelines can make the process go significantly smoother.