No way around FHA's 'flipper' rule

Flickr photo by lindyireland.

Q: Please explain why the Federal Housing Administration (FHA) will not allow a buyer to purchase a home that was sold within the previous 90 days? We have asked this question numerous times and everyone just goes around it and says FHA will not allow this type of loan.

We have seen several properties that we really want, but we keep being rejected because we have to go FHA (we have only a 3.5 percent downpayment). Why is this a rule? Are there any ways to work around it?

A: The only thing you can do to work around this issue is to restrict your house hunt to homes near or past the 90-day time frame. You must close your purchase or escrow at least 90 days following the closing of the previous purchase -- and honestly, many sellers will simply prioritize offers from wannabe buyers using conventional (i.e., non-FHA) financing.

Let's get clear on what this rule is and why it exists. FHA doesn't actually offer loans; it simply insures loans made by mortgage lenders against the risk of default. That just means that if you default, FHA agrees to cover the lender's losses, so long as the lender ensures that you, your loan and your transaction meet a set of guidelines.

FHA's aim is to ensure that mortgage loans stay available to borrowers who otherwise wouldn't be able to qualify for a home loan.

Right now, the lowest "conventional loan" downpayment requirement is around 10 percent. By insuring loans with downpayments as low as 3.5 percent, FHA allows you and people in your situation to buy when they would be blocked from participating in the market otherwise.

But here's the deal: FHA's position is that a large number of homes that were walked away from and/or foreclosed on during this recent housing crisis were homes that had been flipped, or bought and resold very quickly at a dramatically higher price for profit.

From the FHA's perspective, the flipping phenomenon was partially to blame for the runaway appreciation in home prices and, when values dropped, the owners who had paid these inflated values were simply much more likely to abandon their homes or otherwise lose them through foreclosure. ...CONTINUED

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