Can I use an FHA loan to buy a flipped house?
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UPDATED: Dec 27, 2012
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Yes, you can use an FHA loan to buy a flipped house—at least for now.
Up until recently, the Federal Housing Administration (FHA) would not insure a home loan for a house that was resold within 90 days of purchase. Fortunately, the FHA has waived its so-called anti-flipping rule until 2014.
The FHA insures mortgage loans for borrowers with poor credit or low down payments. Because this government organization guarantees loans, lenders enjoy offering FHA loans to qualified borrowers since their loss will be minimized by the federal government’s insurance in the event of default.
The purpose of the FHA’s anti-flipping rule was originally to prevent predatory flipping, whereby homes were resold at inflated prices to unsuspecting borrowers after being upgraded and improved by house flippers. But thanks to the housing bubble, the real estate market was flooded with foreclosed properties. Unfortunately though, the FHA’s anti-flipping rule prevented FHA loans from being used to purchase most foreclosed properties since investors would purchase foreclosures at auctions with cash then try to sell them on the market—usually within 90 days of a purchase. Since foreclosed properties attract crime and lower neighboring property values, the FHA lifted its anti-flipping rule in order to encourage investors to continue buying and selling foreclosures.
There are still requirements that must be met in order to use FHA financing on a flipped house:
- Sales transactions must be conducted at arm’s length. This means that there can be no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- When the sales price of the property is 20 percent or more above the seller’s acquisition cost there must be documented justification for the increase.
- Home loans obtained through the FHA’s Home Equity Conversion Mortgage Program are ineligible.