What you need to know if you’re buying an FHA “flip” in Scottsdale

I’m been working with a buyer, who is purchasing a home with FHA financing.  An investor bought the home at a trustee sale less than 90 days ago, renovated it, and then listed the property for sale. Because the buyer’s offer was accepted in this 90 day window, there are several FHA guidelines that must be followed.

Diane Gerdes, at The Mortgage Advantage shared the details with me:

FHA loans mandate guidelines for a property “flip”, or in layman terms: a property that has changed ownership within 90 days.

Underwriters have been given a list of red flags for property flips.  They include the following:

• If the sales price is 20% or more over seller’s acquisition cost and the increase in value is due to improvements/renovation:   The appraiser is required to verify the repairs or work to the property in order to substantiate the increase in value.  A seller’s list of improvements added to the body of the appraisal with the appraiser’s comments will be required to justify the increase. Before and after pictures are welcome.
• If the appraiser cannot warrant that legitimate work was done to the property to substantiate the increase in value, then a second appraisal will be required.   This parts hurts: the lower of the two will be used for the appraised value. (FHA loans will require an automatic second appraisal unless there is  less than a 20% increase)
• The increase in value is not due to any significant improvements:  The appraiser will be required to provide explanations of the increase in property value and provide sales comparables to support that value since the prior title transfer; OR if the appraiser cannot justify the increase in value, a second appraisal may be required.  The lower of the two will be used for the appraised value. (Still hurts)

If the sales price is less than 20% over seller’s acquisition cost (the seller can provide receipts for improvements to help get to the 20%) typically a second appraisal is not required.  But keep in mind it is underwriters discretion.

FYI:  If you purchasing a “flipped” home utilizing FHA financing, a copy of the home inspection is required to be viewed by the underwriter.  All noted items will need to be repaired before closing. FHA expects these quick turnaround properties made near perfect.

(I added the underlining, to note some key points.)

For more information on these requirements, please contact Diane directly at:

Diane Gerdes
The Mortgage Advantage, Inc.
480-831-1588

For more on buying a house in Scottsdale:

• Bankruptcy, Foreclosure, Short Sales & Loan Modifications: How long until a home buyer can qualify for a loan?
• FHA Streamlined 203(k) Loan Program: An option for home buyers to renovate home before move in
• Understanding the Impact of Mortgage Modification, Short Sale, Foreclosure and Bankruptcy on Your Credit Score