For many years, FHA had a rule which stated that if a seller owned a home for fewer than 90 days, FHA would not insure a mortgage for a new buyer. This was done to try and keep speculators from buying a home, doing minor cosmetic repairs, and reselling at an inflated price.
FHA Commissioner David H. Stevens announced, effective today, this rule will be suspended for some transactions. The hope is that investors will now be willing to buy homes in disrepair, fix them, and sell them to legitimate buyers using FHA financing, which offers 3.5 percent down payments.
But FHA has included some safeguards in its revisions. "All transactions must be arm's-length, with no identity of interest between buyer or seller or other parties participating in the transaction". This means that parties in the transaction can not be related either by blood or business ties.
Another requirement is that any increase in price (from the first purchase to the "flip") must be reasonable. If the price jump exceeds 20%, the FHA lender must provide documentation to prove the increase is justified. They will also have to have an independent property inspection completed so the buyer understands the property's true condition.
If FHA is right, this plan will allow investors to buy vacant homes, clean them up, and sell them for a reasonable profit to people who will live in and maintain the homes.
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