|July 17, 2003|
Previously published on Summer 2003
On May 1, 2003, the Department of Housing and Urban Development issued a new rule addressing property "flipping". Property flipping occurs when a property recently acquired is resold for a considerable profit with an artificially inflated value, often assisted by a lender's collusion with the appraiser. Specifically, the Federal Housing Administration makes flipped properties ineligible for FHA-insured mortgage financing.
Although exceptions may apply, in order to be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. Further, the mortgagee must obtain documentation verifying that the seller is the owner of record and must submit this documentation to HUD as part of the application for mortgage insurance. This documentation may include, but is not limited to, a property sales history report, a copy of the recorded deed from the seller, or other documentation (such as a copy of a property tax bill, title commitment, or binder) demonstrating the seller's ownership.
Time Restrictions on Re-sales
The new rule also places time restrictions on re-sales. The eligibility of a property for a mortgage insured by FHA is dependent on the time that has elapsed between the date the seller acquired the property (based upon the date of settlement) and the date of execution of the sales contract that will result in the FHA mortgage insurance (the re-sale date). The mortgagee must obtain documentation verifying compliance with the time restrictions and must submit this documentation to HUD as part of the application for mortgage insurance.
Re-sales Occurring 90 days or Less Following Acquisition
Under the new rule, if the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for an FHA insured mortgage.
Re-sales Occurring between 91 days and 180 days Following Acquisition
If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for an mortgage insured by FHA. However, HUD will require that the mortgagee obtain additional documentation if the re-sale price is 100 percent over the purchase price. The documentation must include an appraisal from another appraiser. The mortgagee may also document that the increased value results from the rehabilitation of the property. Under the new rule, HUD may revise the level at which additional documentation is required at 50 to 150 percent over the original purchase price. HUD may revise this level by Federal Register notice with a 30 day delayed effective date.
Re-sales Occurring Between 91 Days and 12 Months Following Acquisition
If the re-sale date is more than 90 days after the date of acquisition by the seller, but before the end of the twelfth month after the date of acquisition, the property is eligible for an FHA mortgage. However, HUD may require that the lender provide additional documentation to support the re-sale value of the property if the re-sale price is 5 percent or greater than the lowest sales price of the property during the preceding 12 months (as evidenced by the contract of sale). At HUD's discretion, the documentation must include, but is not limited to, an appraisal from another appraiser. HUD may exclude re-sales of less than a specific dollar amount from the additional value documentation requirements. If the additional value documentation supports a value of the property that is more than 5 percent lower than the value supported by the first appraisal, the lower value will be used to calculate the maximum mortgage amount. Otherwise, the value supported by the first appraisal will be used to calculate the maximum mortgage amount.
Re-sales Occurring More than 12 Months Following Acquisition
Under the new rule, if the re-sale date is more than 12 months following the date of acquisition by the seller, the property is eligible for an FHA mortgage.
Exceptions to Time Restrictions on Re-sales
The time restrictions on re-sales described above do not apply to:
(1) Re-sales by HUD of Real Estate-Owned (REO) properties and of single family units in certain revitalization areas; and
(2) re-sales of properties purchased by an employer or relocation agency in connection with the relocation of an employee.
The effective date of the new rule is June 2, 2003.