What Is the FHA Flip Rule for Property Investors?

The Federal Housing Administration (FHA) flip rule is a federal regulation addressing property flipping in the real estate market. It applies to properties purchased with FHA-insured mortgages. Its primary objective is to safeguard homeowners from predatory practices and inflated property appraisals, promoting stability in FHA-backed transactions.

What the FHA Flip Rule Is

The FHA flip rule, established by the Department of Housing and Urban Development (HUD), protects FHA borrowers from fraudulent practices in real estate transactions. Its core purpose is to prevent property flipping, where a property is quickly resold for a significantly higher price, often without substantial improvements justifying the increased value. This can lead to inflated appraisals and leave unsuspecting buyers with homes valued above their true market worth.

The rule also mitigates financial risk for the FHA mortgage insurance fund. When properties are rapidly resold at artificially inflated prices, a greater likelihood of default can strain the insurance fund. By imposing restrictions on quick resales, the FHA ensures properties financed with FHA loans reflect legitimate market values and that borrowers are not burdened with excessive debt. This regulation helps maintain the integrity of the FHA loan program.

Key Timeframes for Application

The application of the FHA flip rule depends on the duration of the seller’s ownership, with different requirements for various timeframes. The ownership period is measured from the date the seller acquired title to the property until the date the new sales contract is executed for the FHA-insured mortgage.

Properties sold within 90 days of the seller’s acquisition are ineligible for FHA mortgage insurance. This prohibition deters immediate speculative resales that often involve minimal or no improvements, preventing quick profits from artificially inflated values.

For properties resold between 91 and 180 days after the seller’s acquisition, FHA financing may be possible but comes with additional requirements. If the resale price is 100% or more above the seller’s original purchase price, a second appraisal is mandated. This additional appraisal must be performed by a different appraiser and cannot be paid for by the buyer.

Lenders must obtain documentation justifying the substantial increase in value, such as evidence of significant renovations or repairs. If the second appraisal yields a value more than 5% lower than the first appraisal, the lower value must be used for loan underwriting purposes. After 180 days of ownership, the FHA flip rule does not apply, and the property is eligible for FHA financing without time-based restrictions.

Circumstances Not Subject to the Rule

While the FHA flip rule broadly applies to properties financed with FHA loans, several circumstances and types of sellers are exempt from its restrictions. These exemptions acknowledge situations where the rapid resale of a property does not indicate predatory flipping practices.

Properties sold by government agencies, such as HUD or VA, are not subject to the flip rule. This also extends to properties sold by government-sponsored enterprises like Fannie Mae or Freddie Mac, which often acquire homes through foreclosure or other means. These entities are not considered to be engaging in speculative flipping.

Sales of properties acquired through inheritance are also exempt from the FHA flip rule. This exception recognizes that heirs may need to sell an inherited property without having occupied it for a minimum period. Similarly, properties acquired by employers from relocating employees, or by relocation service companies assisting with employee moves, are generally not subject to the rule.

Furthermore, sales by approved non-profit organizations to low-to-moderate income buyers are typically exempt, supporting affordable housing initiatives. New construction properties sold by a builder are also excluded, as the rule primarily targets existing homes that are quickly resold. Additionally, properties located in Presidentially Declared Major Disaster Areas may also qualify for an exemption, depending on specific HUD approvals.