HUD Imposes New Requirements for FHA Mortgage Insurance

I am writing this article because therehas been a lot of questions about "SEASONING". This is a fax I received last year regarding "FLIPPING". If you on this site don't like the message don't kill the Messenger.





TO: Underwriting Staff and Escrow

FROM: Donald Cole

Cheif Underwriting Counsel



DATE: May 30, 2003



SUBJECT: Flip Transactions-HUD Final Rules



Underwriting Bulletin



The Departmentof Housing and Urban Development (HUD) has issued a final rule intended to prohibit "flipping" in HUD's Single Family Mortgage Insurance Program. The rule takes effect June 2, 2003.



The new rule defines flipping as "the predatory lending practice whereby a property recently acquired is resold for a considerable profit with an 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 on which seller acquired title to the property (being the date of settlementand not the recording date of the deed);



2) the "re-sale" date, being the date on which the the buyer/borrower signs a contract to purchase the land;



3) the price at which the seller acquired the land; and



4) the price at which the buyer/borrower will purchase the land.



In sum, the new rule operates as follows:



First, if the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for FHA MORTGAGE INSURANCE. SEE EXCEPTIONS BELOW.



Second, if the re-sale date is between 91 days 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 re-sale price if the re-sale price is 100 percent greater than the seller's acquisition price.



The additional documentation must include an additional appraisal or evidence of rehabilitation or improvement to the property. The 100 percent figure is not a fixed number. HUD may adjust the number from time to time within the range of 50 percent to 150 percent. Same exceptions as in first paragraph; see below.



Third, if the re-sale date is more than 90 days after date of acquisition by the seller but less than 12 months after date of seller's acquisition, then the property is eligible for FHA MORTGAGE INSURANCE, except that lender must provide HUD with additional information to support the re-sale value of the property "if the re-sale price is 5 percent or greater than the lowest sales price of the property during the preceeding 12 months". HUD may remove sales prices below a certain dollar amount from this provision, but the new rule does not set any such dollar amount. Same exception as under first and second paragraphs: see below.



The following transactions are the only exceptions toall three of the above paragraphs: re-sales by HUD of REO and similar properties; and re-sales of properties purchased by an employer or relocation agency in connection with the relocation of an employee.



Finally, the HUD rule imposes an "owner of record" requirement. To be eligible for FHA MORTGAGE INSURANCE, the property must be purchased from the owner of record. THE TRANSACTION MAY NOT INVOLVE ANY SALE OR ASSIGNMENT OF THE PURCHASE CONTRACT. Lender must submit to HUD documentation verifying that the seller is the record owner. A title committment may be used for this purpose.





As you can see I can also get information from people in high places. I hope this will allow the Investors on this website to understand what most of the posts incorrectly call "seasoning requirements"



The investor who "flips" properties need to be aware of these changes when the buyer is getting a first mortgage. There are also guidelines for the buyer if they already own a property.



I am sure most of you will now be able to see all the the loopholes in this bulletin. Loopholes does not mean that it is illegal.



I hope this makes your understanding of what everyone thinks can't be done DOABLE



Lori