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Wanna Flip or Buy One? Property Flipping Guidelines 101

July 11, 2014

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When an investor purchases a property and then resells the property within 180 days it is considered a “flip”. Most of these properties will need rehab repairs to some extent.  Lenders have specific guidelines in place to protect the borrower and also their own interests.  Before you put your offer in discuss this with your agent.
Here are the Fannie Mae, Freddie Mac, FHA, VA and USDA guidelines:
Conventional  Loans (FannieMae/FreddieMac)

Properties acquired by the seller within 90 days preceding the current sales contract date are acceptable provided:

  • No Non-Arms Length Transactions
  • If the sales price has increased greater than 20%, the increase must be justified.
    • If the value increase is due to recent renovations or improvements, the appraiser must supply interior photos of the renovations and comment on the cost of the repairs/renovations and likely contribution to the value increase.
    • If no renovation was performed, an appraisal review must be ordered. This is when a 2nd appraiser reviews the original report and provides feedback…basically they critique the first appraisal to be sure the value is supported. 
FHA
Sales within 0-90 days of seller’s acquisition: (calculated from seller’s acquisition date to new purchase contract date)
  • All transactions must bearms-length; no identity of interest between buyer, property seller or third parties. Specific ways toensure anarms-length transaction include:
    • Property seller currently holds title to the property.
    • LLCs, corporations or trusts serving as property sellers must meet all applicable state and federal law.
    • The property cannot have been sold in the 12 months prior to the transaction in which the seller acquired the property.
    • The property was marketed openly and fairly.
  • A lender may allow the 90-day flip waiver if the sales price is less than 20% over the seller’s acquisition cost for all property sellers, including private sale transactions.
  • A lender may allow the 90-day flip waiver with a sales price greater than 20% above acquisition only if justification for the increase in value can be verified. Document that the seller has completed sufficient legitimate renovation, repair, or rehabilitation work on the subject property to substantiate the increase in value.
    • Must have DU Approve/Eligible – No manual or LP
    • Max DTI is 50% regardless of AUS (automated underwriting) response
    • A second FHA appraisal must be ordered:
      • And completed by a different appraiser
      • The cost of the second appraisal may not be charged to the home buyer (or non borrowing spouse).  It can be paid by seller, agent, lender or other family member
      • The second appraisal must not be used for case processing and must not be entered into FHA Connection.
    • A property inspection must also be ordered and provided to the purchaser before closing. The borrower may be charged for this inspection.

Sales within 91-180 days of seller’s acquisition:

A second FHA appraisal is required if the sales price has increased by 100% or more. The borrower may not be charged for the appraisal. This requirement does not apply to exempt entities listed above.
  • When a second appraisal is required and the appraised value is more than 5% lower than the first appraised value, the second appraisal must be used to calculate the maximum mortgage amount.

VA and USDA

  • There are no specific guidelines regarding flip transactions, but the new purchase price must be compared with the original price paid by the investor and the appraiser must justify the increase if value. In other words, evidence of some repairs or maintenance must be present if the value increased substantially.

Need help with a flip purchase loan.  Our goal is to make the purchase a smooth transaction to close on time and to find you the best loan program/rate to save you a lot of money!

Visit Our Website:   http://www.pmccanhelp.com/

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