FHA 90-Day Rule

[Note: If this rule applies to your business, you probably want to read Part 2 of this post as well…it has more relevant information that you will likely find important.]

I’ve mentioned numerous times throughout this blog the FHA 90-Day Rule, but since I still get questions about it, I wanted to spend a post going into a bit more detail…

First, here’s the text of the actual FHA regulation:

(b) Time restrictions on re-sales—(1) General. 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 shall obtain documentation verifying compliance with the time restrictions described in this paragraph and must submit this documentation to HUD as part of the application for mortgage insurance, in accordance with §203.255(b).

(2) Re-sales occurring 90 days or less following acquisition. If the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage to be insured by FHA.

(3) Re-sales occurring between 91 days and 180 days following acquisition. (i) If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for a mortgage insured by FHA.

(ii) However, HUD will require that the mortgagee obtain additional documentation if the re-sale price is 100 percent over the purchase price. Such documentation must include an appraisal from another appraiser. The mortgagee may also document its loan file to support the increased value by establishing that the increased value results from the rehabilitation of the property.

As you can see, the “90-Day Rule” that I generally refer to is actually a set of rules regarding the resale of property to FHA buyers.

Here are the key points of this rule:

• A property is ineligible to be sold to an FHA buyer within the first 90 days after the most recent purchase. In other words, if I buy a house today, and want to resell it to a buyer using an FHA loan, I have to wait 90 days (91 actually) from today before I can resell the property to that buyer. As a house flipper, it should be clear why this rule can cause frustration — it generally takes about 4-5 weeks to rehab a house after I purchase it, but given this rule, I can’t resell the house to an FHA buyer for at least 8-9 after that; that means I either hold off putting the property on the market, or I risk finding a buyer but not being able to close for nearly two months.
• A property is eligible to be sold to an FHA buyer after 90 days, but any sale occurring before 180 days that is at least 100% over the purchase price is subject to additional appraisal scrutiny. In other words, if I buy a house today, and want to resell it a buyer using an FHA loan in 91-180 days for more than double what I bought it for, I will have to get two appraisals for the property. While this rule isn’t nearly as harmful as the first one — if I plan to sell it for more than double what I bought it for, hopefully it’s really worth that — it can still cause issues. Appraisals these days are all over the map, and anytime you need to rely on multiple appraisals to support your sale price, you run some risks of at least one of them coming in low. Additionally, the second appraisal takes time and money, often delaying these property closings.

If you’re a real estate flipper, these two rules are critical, especially in today’s market where many (most?) of the qualified buyers are using FHA loans. Make sure you work these restrictions into your business strategy, your schedules, and your contingency plans.