The FHA anti flipping rule is back in effect on January 1, 2015. After a 4 year waiver, FHA has decided not continue to waive this rule another year. How does this affect real estate investors? It means that you must own a property for 90 days prior to being able to sell it to an FHA buyer. Since a significant portion of retail buyers of the homes most investors flip are getting an FHA loan to finance the purchase, this is an important change. But when one door closes, another one opens because Fannie Mae just announced a 3% down loan program for first time homebuyers. Arguably the most attractive part of an FHA loan is the 3.5% down payment requirement. So with Fannie Mae jumping into the world of offering a ultra low down payment option, this may help curb the issue of FHA allowing the anti flipping rule to be reinstated. To learn more about the ins and outs of all this, check out this video:
The FHA Anti flipping Rule and Fannie Mae's New 3% Down Loan
*As it Pertains to Real Estate Investors*
I want to describe what these two different loan programs, these two updates that are occurring as a result of these different programs, how that affects real estate investors. Specifically, those investors that buy properties, single family homes, fix them up, and then resell them which his a large majority of the real estate investors out there.
FHA's Anti-Flipping Rule
- Title seasoning. Ninety days.That means that the seller has owned the property for 90 days. That is what this anti-flipping rule's all about. The FHA buyer, if they're going to get an FHA loan, the seller's had to be on title for 90 days.
For the past four years, 2010 through 2014, this anti-flipping rule has been waived. What they were doing was encouraging real estate investors to buy foreclosures, fix them up, and then sell them right away to re-stimulate what had become a pretty serious real estate bursting of the bubble.
Starting January 1, 2015 this went back into effect. If you just bought a property, and you're going to fix it up, and you're going be the owner for less that 90 days, and then an FHA buyer comes along, you have to wait until the 91st day to sign that contract with that FHA buyer. That's the anti-flipping rule.
Most real estate investors cringe at this because they think it's ridiculous. I agree. Regardless of what you paid for a property, that should have nothing to do with what you can resell the property for. Even if you bought it really cheap today, and you can sell it tomorrow for a lot more money, that shouldn't matter. An appraisal is going to establish value, not how long you've owned it. This entire anti-flipping rule is ridiculous, but it is what it is, and it's in place. They put it on hold for four years, so we had a four-year hay day, if you will. Those days are over.
By the way, it wasn't really that big of a hay day. If you tried to sell a property to an FHA buyer and you owned it less than 90 days, it was tough. They would do two appraisals. Then they'd make sure the desktop appraisal matched the two actual, physical, appraisals.
If there was anything wrong with the property, they'd demand an inspection be done in most cases. If anything showed up on the inspection report, they made you fix it. Even trying to sell to an FHA buyer when you owned it less than 90 days during this, quote, four year postponement of this rule, was still a nightmare. It wasn't that good of a thing, even when it was.
If you're a real estate investor, buying houses, fixing them up, and selling them, in most cases you're buying those properties in areas in that price point that FHA buyers purchase. They do have limits. These buyers are going to have limits based on price. I've got another one of these markers right next to me here. Limits in most cases, what? $300, in many part of the country, some parts $200. It depends on the area. What I mean is you're not typically getting an FHA buyer on a half million dollar home. FHA buyers, not only is their limit typically in the range where we do our flipping of houses, but also I did some research, and I think something in the range of, and it's kind of hard to figure it out, but something right about 25% of all buyers in recent times have been FHA buyers. That's a lot.
A lot of people have gotten FHA loans.
Why is that? Here's the main reason, in my opinion, 3.5% down payment required. To me, this is the big 80/20 rule. This is the 80% of the reason why. People are getting FHA loans because it only requires 3.5% down.
People like FHA loans because some of their underwriting guidelines are a little bit relaxed.
For example, if you have student loans in deferment, In FHA underwriting guideline, you don't have to put that in the debts/income ratio. Almost every other lender's like, "Wait a minute. Just because the student loans are in deferment, they're going to have to pay them at some point." They actually include whatever those student loans in deferment, whatever that payment is, they include that in the debt to income ratio. FHA has some flexibility there.
Another thing FHA is, somebody's never bought a home before in their life and they have no credit, sometimes they'll use utility bills as a trade line. FHA has relaxed underwriting guidelines, but most importantly, it only requires 3.5% down. That's why I think 25% of all buyers get FHA loans.
What Does This Mean to You as An Investor?
It means, if you're trying to flip a property fast, you got a problem here. You got to wait 90 days.
- Time is money. What if you got the property under contract, like I sometimes talk about in my videos, and you find a buyer right away. You don't even own it yet.
- FHA buyers will make that really difficult. Especially now that they have closed the window for January 1, 2015. When on door closes, another one opens.
They now have just announced that they're going to have a 3.5% loan opportunity, or option. FHA is the Federal Housing Authority, they don't actually give the loan. They guarantee the loan. When a bank, like Bank of America, when they issue a loan that's an FHA loan, FHA is the one guaranteeing it. If that person doesn't pay the loan, and it goes into default, and goes into foreclosure, it goes back to FHA. It doesn't go back to Bank of America. Bank of American gets their money back because it's guaranteed by FHA.
By the way, none of this matter if you're in Canada. Don't even worry about ... or not the United States. This is all the United States based stuff. If FHA is the guarantor, then technically the bank is just making sure that it falls within their guidelines.
Fannie Mae is going to buy the mortgage on the secondary market.
What's going to happen is the loan is going to get originated, and then they're going to bundle it up with a bunch of other loans into a package, and then they're going to sell on the secondary mortgage market to Fannie Mae. Fannie Mae actually buys the loan. Then the bank usually continues to be the loan servicer.
Fannie Mae is now allowing for 3% down. That doesn't mean the bank, who's actually giving the money, is going to do that. It means that if they create a loan and there's only 3% down, then Fannie Mae will still buy it. That person has to be a first time home buyer. That does kind of shrink that a little bit
It's nice, one door closes January 1st, that door is closing. This one is opening. Fannie Mae, and again, it depends on which mortgage broker you talk to, but from everything I can gather usually has about a 30 day title seasoning rule which is not nearly as bad. Thirty day title seasoning rule for Fannie Mae. A lot of arrows, a lot of things moving around here.
What Kind of Loan is Your Potential Buyer Trying to Use?
- If they're using an FHA loan, and you've only owned the property 30 days, you know you can't even try to sell it to them. You can't even sign a contract with them until the 90th day.
- Fannie Mae, if you've owned it 30, I guess you've reached that period of time. You're good to go. Since this is relatively new, that's not going to be as established of a loan, so it may not go through either.
When you are trying to sell a property, one of the biggest questions to ask is: What kind of loan is it?
If somebody has 3.5%, they may have 5%. What you may want to try to do, even if it's an FHA buyer, is ask them would they be open to going conventional and using 5% down, and then you can pay all the closing costs. Maybe the have 3.5% down, and they have another 1.5 saved up for closing costs.
Five percent is usually the cut-off for conventional. A lot of conventional loans are 5%. Again, as I just mentioned ... conventional ... 3% down, Fannie Mae is considered like a conventional loan. You may even be able to go as low as three, but at least five. You want to try and take borrowers conventional whenever possible.
Anytime you list a property for sale, put it in the realtor remarks that you require that whoever makes the offer to pre-qualify with your mortgage broker. Hopefully, that will also help you. If they pre-qualify with that mortgage broker, they would say, "Yeah, they can go conventional here. Yeah, they're an FHA buyer, but they can also go conventional."
You want to try and take these people conventional even if you have to pay the closing costs or something, or give them some incentive.If you do, conventional is a lot easier, not only from an underwriting perspective, because it usually is a lot faster than FHA.
A lot easier to get a deal done even if you have a low amount of title seasoning, maybe you've owned the property for 15 days, when the loan's conventional. In fact, local banks, they don't even care what the title seasoning is. It's really just the larger organizations that are selling on the secondary market, do care a little bit. If they're going to sell to Fannie Mae, of course, they have to follow their guidelines.
If they're an all cash buyer, hallelujah. That's what you really want. If it's cash, I even take a cut. I won't even sell it full price. If they're going to pay all cash, it's worth it to me to pay it ... If an FHA buyer comes along at $120, conventional's at $110, and the all cash at $105, all cash at $105 is getting the deal.
Again, each situation is a little different. If you've got to go to a mortgage broker, and they know for sure that the conventional buyer at $110, no question, are going to close because they got a perfect loan application, then that's different. That's where, also, if you are a mortgage broker, or you've ever been one in the past, that's a huge benefit in being a real estate investor. You can anticipate which potential buyers are most likely to actually close, and which ones their loans are going to fall apart.
Most people go into buying a home with all kinds of unbridled optimism that they're going to get the loan, everything is going to work out well. We're investors, we have to be somewhat pessimistic and keep an eye on all the potential problems that can occur. Probably the major problem many investors deal with is when the buyer's loan falls apart right before closing and they don't get the loan.
The way you help yourself is you have to study these buyers, and interview them, and talk to them or their buyer's agent, if they're represented by an agent, and find out what kind of loan they're getting. Talk to their mortgage broker. Really find out that situation to make sure you don't tie your property up to sell it and then they drag you down 45 days. The loan doesn't go through because you haven't owned it 90 days. If it's a Fannie Mae, you may have some obscure underwriting rule. You've really got to do your homework upfront, before you agree to sell, and you countersign that offer from that new buyer.