FHA 90 day flip rule

Question: My FHA buyer's close of escrow is delayed because the lender is asking for the home inspection and information on the seller's LLC. Why?

Answer: We will assume the contract was executed within the 90 days of the seller acquiring the property. In February of this year, The Waiver of Requirements of 24 CFR 203.37 amended the FHA 90 day flipping rule, or flopping as it is now called by some underwriters. To keep things spicy, it was not amended in a mandated FHA mortgagee letter. Therefore some of the lenders are not as excited about originating financing within the 90 days. Keep in mind this is brand spanking new, and the banks that embraced it early on, are getting their hands slapped from HUD. In April, second appraisals were rare. But today, more often than not, it will be required. If the sales price is 20 percent or more over the seller's acquisition cost, the lender is required to get a property inspection. The thought process behind this guideline is that the home was purchased at a deep discount, therefore the seller should spend some bucks to gussie it up. And it better be darn next to perfect. The lender may require any and all repairs, including minor cosmetic items to be completed before close of escrow, even if your buyer could care less, and the appraisal did not mention anything about a stove and tip-over protection. A second appraisal is typical to cover the Bank's "you know what" to validate the purchase price. The second part of question can make you cross-eyed. FHA is scrutinizing the "Identity of Interest," between the buyer, seller and other parties participating in the sales transaction. And we aren't talking about being personally related. One bank informed us that if the property is owned by an investor, an LLC, and the selling real estate brokerage is an LLC, and if there is any ownership between the two, then FHA will not do the loan until after the 90 days is up. So, just to be clear, it is not okay during the first 90 days but the 91st day it becomes acceptable. This is one bank's interpretation of the ruling. Regardless, documentation on the LLC will be required. HUD is closely analyzing the purchases of these flopped properties. Be prepared for additional documentation and second appraisals. FYI: If your seller purchased the property under his name, then transferred it to an LLC at a later time, the date of the deed transfer, not the purchase, could start the clock for the 90 day flipping/flopping guidelines.