A recent Fidelity National Title Insurance bulletin has brought to our attention regulations in regards to the “Anti Flipping” provisions passed by HUD. If you are a real estate investor, flipper, developer, etc. it is important to understand some of the restrictions that a potential buyer will have when purchasing such a property while obtaining mortgage insurance.
On June 2nd of 2003 the U.S. Department of Housing and Urban Development (HUD) issued a rule that was intended to prevent property flipping in connection with HUD’s Single Family Mortgage Insurance Program. A temporary waiver of that rule, which was made applicable to sales contracts executed on or after February 1, 2010, expires on December 31, 2014.
As a result the Anti- Flipping rule has been reinstated for contracts (and mortgages) made on properties executed on or after January 1, 2015. Fidelity National Title Group issued a memo back in 2003 outlining proper protocols a title insurance company should abide by with respect to flip transactions. With the rule being reinstated it is appropriate to point out the HUD Final Rules that were established back in 2003.
The rule defined flipping as “the predatory lending practice whereby a property recently acquired is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.”
To obtain FHA mortgage insurance of a buyer’s mortgage, lenders will now have to consider:
1- the “acquisition” date, being the date of which seller acquired title to the property
2- the “resale” date, being the date on which the buyer/borrower signs a contract to purchase the property
3- the price at which the seller paid
4- the price at which the buyer paid
If the resale date is between 91 and 180 days following the date of acquisition by seller, then the property is generally eligible for FHA mortgage insurance, except that lender will be required to submit to HUD additional documentation to support the value of the resale price if the resale price is 100% greater than the seller’s acquisition price. The additional documentation must include an additional appraisal or evidence of rehab or improvement to the property. The 100% figure is not a fixed number. HUD may adjust the number from time to time within the range of 5% to 150%.
If the resale date is more then 90 days after the original acquisition but less than 12 months after such date, then the property is eligible for FHA mortgage insurance, except that the lender must provide HUD with additional info to support the resale value of the property “if the resale price is 5%or greater than the lowest sales price of the property during the preceding 12 months.” Lenders will interpret these words, not us.
The HUD Rule also states that there is an “owner of record” requirement. To be eligible for FHA mortgage insurance the property must be purchased from the owner of record. A Title Insurance commitment can be used to satisfy this standard.
If you have any questions in regards to the ruling please do not hesitate to contact us directly.
Thank you to the Fidelity National Title Insurance Group for this memo.