Buying and selling flipped properties can be challenging in this market depending on the financing the buyer is trying to get. For example, many people don’t know that conventional financing or VA does NOT have an anti flip policy, but many lenders still apply their own rules, and that all FHA buyers now have to wait >90 days to purchase a home that was fixed and flipped by a seller. Understanding the different financing rules that are in place today for buyers and sellers and flipped properties is essential for success in today’s marketplace.
Conventional Guidelines for Financing Flipped Properties
What many people do not know, is that conventional financing does not have an anti Flip policy, so there is no limit on the amount a profit a seller can make in any given amount of time when reselling a home.
But, what buyers and Sellers needs to look out for, is lenders who will apply their own set of “overlays”, which are rules a lender will apply on top of regular conventional underwriting guidelines to minimize their risk on the transaction. For example, there are some lenders who will ask for two appraisals, if the profit to the seller is more than 20% in less than 90 days for example.
Another issue that comes into play, is when a buyer needs to get financing over 80%, because now the buyer has to qualify for mortgage insurance “PMI”. When “PMI” companies have to get get involved in the transaction, they may want to see more documentation to justify the appreciation on the property, so be prepared to document the value increase thoroughly with supporting documentation, or once again, a particular lender may ask for a second appraisal.
Therefore, the secret to funding a flipped property using conventional financing, is to make sure the lender has No Flip Overlays.
FHA Guidelines for Financing Flipped Properties
The FHA just Discontinued their 90 Day Flip Waiver as the end of December 2014! This waiver allowed FHA buyers to purchase properties that are being resold within 90 days of being fixed and flipped. This means that all FHA buyers will have to wait >90 days to purchase a home that was fixed and flipped by a seller.
IMPORTANT: If you are shopping for homes and looking to use FHA financing, make sure your purchase contract and loan application are dated 90 days AFTER the home was acquired by the seller, otherwise it will not qualify for financing. Click HERE for some other FHA rules to be aware of.
If there is greater than 100% profit to the seller within 180 days, the underwriter may ask for a 2nd appraisal to substantiate the value of the home. The seller will also probably have to provide proof of all the repairs done to increase the value of the property by 100%.
VA Guidelines for Financing Flipped Properties
There is also a misconception out there that the VA has their own set of rules for flipped properties. The VA does NOT have an anti flip rule, but the catch once again is, there are many lenders who will apply their own set of “overlays” (lender rules) on a flipped transaction to minimize their risk on a transaction..
So it is important ask a lender upfront what their flipped rules are, so you choose a lender who will follow the VA’s flip rules. I have several VA lenders that we are approved with, who do NOT have any additional VA rules for financing flipped properties.
Address All Concerns Upfront on a Property
A good idea is to address any concerns upfront on all flipped properties. A good rule of thumb for agents and buyers is to check the purchase date when the seller bought the property, as this will determine many of the rules above.
If the property is being resold within 90 days, this is usually where additional rules may apply, so make sure to ask the right questions.
Another good rule of thumb for buyers and agents, is to confirm with the lender if they follow regular conventional and VA’s rules for financing flipped properties, or what “overlays” would they apply on a property..
Doing this homework upfront will ensure the buyer will qualify for financing and there will be no issues getting the transaction closed for all parties involved.
If you have any questions about a flipped property scenario, please do not hesitate to contact me directly at 858-200-9602 to chat.