You've searched for the perfect home for what seems like an eternity. Your Real Estate Agent has shown you so many homes, in Phoenix, that you lost count. She calls you up and says, "I found the perfect home; it has a big backyard, 3 car garage, 5 bedrooms and the location is exactly where you want to be." You're so excited you grab the kids, jump in the car, and drive over.
It's absolutely perfect!! The family loves it, the kids are running around the backyard, your wife can picture her clothes in the master closet, and you see yourself working on your toys in the 3 car garage. You rush to write an offer on the home because you know, in Phoenix, there are multiple offers on everything in this price range. It's so perfect that you're even willing to pay more than the list price just to secure the home. The seller accepts your offer, calls your Realtor, and gives them the bad news. Wait!!! The bad news??? The seller bought this home only 7 days ago, and has now re-listed it for $29,000 more than he paid for it. The property is what is known as a "flipped house" in the Phoenix real estate market. He tells your Realtor that you need to make sure your lender can secure a mortgage on the property, since he just bought it. No problem, right?
Your lender originally prequalified you for an FHA loan with a low 3.5% down payment. You call your lender and he tells you, "I'm sorry we can't do an FHA loan because of the 90-day rule." Your confused. What is the 90-day rule? You look on the Internet and find that HUD's 90-day rule states any re-sales occurring 90 days or less following the acquisition will not be eligible for a mortgage to be insured by FHA. FHA's analysis disclosed that among the most egregious examples of predatory lending was on "flips" that occurred within a very brief time span, often within a matter of days. Thus, the "quick flips" were eliminated for at least 90 days. No FHA loan for you.
Your not worried because your lender is a very smart guy, he's a Senior Loan Officer. He says, "Don't worry, we will just do a conventional loan." Since you have enough to put down 10% for a conventional loan, you think your problem is solved. Your lender is a genius. You start packing all of your belongings into boxes, ordering utilties for the new house and getting ready for the "big" move.
A few weeks go by and your lender calls you and says, "We have a major problem." Your loan was declined because the mortgage insurance company won't issue a mortgage insurance certificate because the property is being "flipped." Oh and by the way, even if you can put down 20% to avoid mortgage insurance we still can't do your loan. You say, "Huh???" "You can't do the loan?" That's right, he can't do the loan because of new guidelines by most major lenders that won't allow financing on flipped properties. What are you going to do now??
Your Realtor is very sharp, experienced and is determined to get this home for you. She has called four different mortgage companies. Luckily, one of the lenders she talks to also has a good network and he refers her to another lender. We can still do your loan with conventional financing, even if the property is "flipped". There is no specific time frame required for conforming conventional seasoning on a purchase transaction. However, the appraiser must provide a 12-month listing history for the property. Frequent listings and/or sales also require explanation on each occurrence or listing and should include the data source(s), offering prices, date(s), and any further evaluation as they may indicate "flipping".
Closing day comes and you finally get the keys to your house. You're so excited that you tell everyone you know, who is looking to purchase a home in Phoenix, to call your Realtor and their new "preferred" Mortgage Consultant. Life is good.
If you, or someone you know, has recently placed an offer on a flipped home in the Phoenix market and is unable to locate financing for their new home, please have them contact The Krushinsky Team at 602-695-7575 or david@dkhomeloans.com. We can still lend on homes that have been owned for less than 90 days. We can also offer rate/term refinances using current appraised value on conventional loans for properties owned less than 6-months.
David,
I'm pretty tough on loan officers, mortgage brokers and lenders on AR.
I always seem to find something wrong with their posts. Usually the data is incorrect.
Just wanted you to know, that I have found your blogs stellar.
It's nice to know there is someone out there that knows as much as I do. LOL.......
Seriously, I'm not that arrogant, but you would be surprised by the terrible information that floats around about home loans. Well, then again, maybe you wouldn't.
Great post David. Thanks for sharing.
"WJ Bradley Mortgage can still do your loan with conventional financing,"
And, what would the down payment be????????
If the 3.5% down payment under FHA was important, how was that done with a conventional loan?????
Melissa - Thank you so much for the positive feedback. It means more than you know to get that kind of compliment from someone you mutually respect.
I completely agree that there is some terrible information out there. The reason I started blogging was to provide my clients an online reference that had accurate information, for my marketplace. Your blogs are excellent too! I love how you personalize them by telling a story. It makes your readers get to know you.
Kari - Thank you!
Lenn - The down payment would need to be 20% for all occupancy types. Since finding the mortgage insurance could be very difficult or impossible, a borrower should plan on financing only 80% of the appraised value or sales price, whichever is lower.
I used a 3.5% down payment, in this example, to educate a consumer that HUD guidelines will not allow a buyer to purchase a home, using an FHA loan, that is owned for less than 90 days. There are a few exceptions to the 90-day rule, for example if the property is owned by an entity that took title through foreclosure i.e. bank-owned. Some consumer's may have the funds available through means of a gift, 401k plan etc. but may opt for a lower down payment, if available.
Thank you for asking the question so I could elaborate and provide some clarity on that point.
Good stuff David. I enjoy your posts and love to find accurate information pertaining to our industry. Keep up the good work!
David, Nicely posted and an easy read. You were clear on things I haven't encounted and will file them away in case I need them. Currently we don't have much "flipping" going on at the beach in NC. We did a few years ago and I can see where the issues of insurance and tighter lending are being affected.
One question I had - my thoughts were how was it going to appraise since it would be it's own comp and certainly wouldn't have appreciated the $29,000 in 7 days.
One question I had - my thoughts were how was it going to appraise since it would be it's own comp and certainly wouldn't have appreciated the $29,000 in 7 days.
Great question Kathryn! The home actually did appraise for $4,000 lower than the sales price. The seller reduced the price after receiving the appraisal. I'm not sure exactly how the seller acquired the home. Arizona has seen our inventory levels drastically reduced. The appraisal was done through the HVCC (Home Valuation Conduct Code) Process. We have another similar transaction with a good gain in appreciation but have also had a lot of low appraisals recently.
AWESOME POST! You can tell who works these distressed markets and who doesn't! YOU DO!
I am curious if this example was a trustee's sale purchase to avoid using it's own comp for the appraisal. We are seeing flips here - big time - and they are usually purchased through the trustee's sale!
Most of the rehab done is done within a week after purchase so that doesn't even buy time for the 90 day seasoning rule!
David,
I purchase 3-5 homes at the trustee sale every week. I flip most of these homes to investors that don't want to track all the sales, drive all the properties, run all the numbers, and bid on all the houses. They just want the end result which is access to cheap investment properties in Arizona. So I can put these investor buyers in touch with you and you can get them conventional loans for 20% down? How many homes can one investor conventionally purchase right now? What is the average interest rate?
I have also heard that the 90 day no flip rule is being shut off for a while....is this true?
Cody Sperber AKA Klever Investor
www.kleverINVESTOR.com
Renee - The property was purchased through a trustee sale. 95% of the loans we do on this type of property are trustee sale purchases.
We are also running into issues on loans that aren't included in this post because it's taking up to 30 days to record the deeds for these trustee sale purchases, something that should be happening right away. That's technically when the 90-day rule starts for an FHA loan or a cash-out refinance 6 month seasoning period. So if we have a contract written for a new buyer on a flip that was written 91 days after the seller bought it, but the transaction wasn't recorded for another 30 days, technically we have to wait 91 days after the recording. Same goes for a cash out refinance.
David, great post!
As a Short Sale investor I 'flip' all my deals to retail end buyers. When I list them, the listing always say NO FHA for those exact reasons you mentioned so I only sell to Cash and Conventional buyers. I meat so many Agents and Mtg Brokers who say there are NO more conventional lenders who don't require seasoning, yet, I still sell them all the time.