FHA, Flipping & Hard Layering

by Peter G. Miller
April 6th, 2010

In January we reported that FHA loan guidelines were being changed and that the 90-day rule was being suspended for a year. This is the rule which said that a home could not be financed with an FHA mortgage if it had been sold-within the past 90 days, a rule intended to block illegal foreclosures.

So far, so good. However, within the change announced by HUD was a curious standard: If the price of the property had increased by 20 percent since the property was last sold, then lenders had to show that the increase was justified.

This is where lenders and layering impact potential sellers and borrowers.

On its face the idea is understandable: There ought to be a reason for a significant price increase, say repair work or a change in zoning.

Lenders, said HUD must justify “the increase in value by retaining in the loan file supporting documentation and/or a second appraisal which verifies that the seller has completed sufficient legitimate renovation, repair, and rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser provides appropriate explanation of the increase in property since the prior title transfer.”

And, said HUD, the lender must order a property inspection and provide a copy of the inspection to the buyer.

In other words, the 20 percent price increase is NOT a ceiling. The price can go up more than 20 percent if it can be explained with an appraisal.

That’s what HUD says.

But our friends at MortgageNewsClips.com report something else. In the case of Bank of America, they say BOA has issued a letter for correspondent lenders saying it “will allow the 90-day waiver for all property sellers, including private sale transactions, but prohibits FHA financing for properties owned less than 90 days if the sales price is greater than or equal to a 20% increase over the seller’s acquisition cost. The 90 days is calculated from the seller’s acquisition date to the purchase contract date of the new transaction.”

No Prohibition

In other words, the FHA has NO outright prohibition on price increases of more than 20 percent for properties sold within 90 days but the Bank of America does.

I raise this matter for several reasons.

First, this is a good case of layering, lender standards that are tougher than FHA guidelines. The usual reason for layering is to assure that the lender is meeting FHA loan requirements, a not unreasonable concept at a time when HUD is reviewing loans with greater diligence.

Second, by prohibiting FHA loans for properties sold within 90 days with a 20-percent price increase, the Bank of America does not have to meet the additional FHA underwriter standards that HUD announced when it ended the 90-day ban. BOA can’t get the standards wrong for the simple reason that it will not entertain such financing.

Is there a way around this dilemma? Just a thought, why not wait 91 days before re-selling….

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2 Responses to “FHA, Flipping & Hard Layering”

  1. Carl Pruitt Says:

    One of the most irritating aspects of the need to show improvements to the property is that everyone seems to assume that the real estate market works like that stock market. That there is some objective value that is not ever affected by the previous seller’s financial or personal situation.

    For example, say I locate a seller who has a serious legal problem and needs to hire a very good, very expensive attorney but he has no liquid funds to do so. That seller decides to quickly liquidate his home at a firesale price in order to raise funds. Assume also that there are numerous higher priced comparable homes already sold recently in that neighborhood. Should repairs or renovations be required in order to justify that sellers home being worth more than the price I pay?

  2. Gina Pogol Says:

    The biggest reason that I can see for lenders’ requirements being greater than FHA’s is that they are subject to having their FHA approval pulled if their loans end up in foreclosure at a higher than the average for their area. Even if every loan they do conforms to FHA guidelines. Considering how many mortgages are FHA these days, you can see why lenders don’t want to risk losing their ability to do this business.

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