Wednesday, January 27, 2010

FHA loosens restrictions that may help investors

Effective February 1st, the FHA will waive its "90 day rule" for 1 year. In its current form, this rule prevents a potential buyer from buying a property that has been owned for less than 90 days by the current owner. The initial basis of this rule was to eliminate "flipping" properties (that is, buying the property only for the purpose of reselling it quickly in a hot market).

This temporary waiver of the rule should help legitimate investors who can rehab a property quickly without imposing an arbitrary timeline before they can sell again. In some cases, this has held back investors looking at buying a low-priced foreclosure "as is" that could be fixed up and sold again quickly due to the additional costs associated with sitting on the property for a time - or alternately - if a rehab was well done and priced to sell quickly, then buyers eligible for an FHA loan were effectively eliminated from bidding on the property.

While this change will help in certain situations, there are still some constraints a potential investor has to consider, including:
  • Transactions must be arms-length, i.e., the buyer and seller must be unrelated
  • A new requirement has been added that if the sales price is 20% more than what it was bought for previously, it requires supporting documentation of improvements, and possibly 2 appraisals.
  • It is not applicable to "reverse mortgages" (or an HECM mortgage as it is officially referred to).
In addition to the items noted above, the waiver does not have any affect on the existing requirement for documentation and 2 appraisals if the price is more than double the previous sale and is being sold in less than 180 days. This does happen on occasion and has surprised more than a few buyers.

Click here to see the full FHA press release.

No comments: