The FHA Considers Dropping the 90-Day Flipping Rule. Here’s Who Could Be Impacted. | Mortgages

The FHA is considering repealing the 90-day flip rule, which prevents borrowers from buying homes that the seller has owned for 90 days or less. The rule was intended to protect FHA buyers from minimally improved flip homes, but dropping it could give first-time and moderate-income homebuyers greater access to move-in-ready properties while other protections remain in place.

Under the current rule, properties resold within 90 days of the seller’s acquisition of them typically aren’t eligible for FHA mortgage insurance. The FHA requires additional documentation, including a second appraisal, for resales that are 91 to 180 days old if the resale price is 100% or more above the seller’s purchase price.

The rule was designed to protect FHA buyers from predatory flipping and reduce inflated values and appraisal fraud.

“The FHA 90-day flip rule was created as a consumer protection measure,” says Ashley Harris, director of homebuyer education at Neighbors Bank. “The intent was clear: Prevent a property from being purchased, minimally improved and quickly resold to an FHA buyer at an unsupported price.”

Harris says the concern was inflated value, inadequate repairs and transactions where buyers didn’t fully understand what they were getting.

The rule puts a time barrier between FHA buyers and fairly priced, fully permitted renovations, though it was written for investors who do nothing and relist a few weeks later, says Doug Van Soest, co-owner of SoCal Home Buyers and a former certified residential appraiser.

FHA buyers are at a disadvantage because they can’t compete with conventional financing or cash buyers on timing. “I’ve watched that play out on $400,000 to $450,000 properties in our markets,” he says. “The FHA buyer circles back after day 91, and the property is already gone.”

FHA officials have publicly discussed eliminating the rule as part of an effort to reduce barriers. In remarks at the Mortgage Bankers Association’s Secondary and Capital Markets Conference in May, Matt Jones, deputy assistant secretary for FHA’s Office of Single-Family Housing, said FHA wants to review the flipping rule, given that valuation technology has improved since it was implemented.

If the FHA removes or loosens the restriction, that could benefit buyers in older markets where renovated entry-level homes are common, especially first-time and moderate-income buyers.

“It would open up FHA buyers to a whole pool of inventory that’s been effectively off limits: wholesaled homes that have been professionally renovated and are ready to move into,” says Chloe Shubin, vice president of strategy at Griffin Funding in San Diego. “This would be most impactful in markets with older housing stock and limited inventory of turnkey homes.

Removing the rule would also affect investors and other sellers of recently renovated homes. It could attract more potential buyers to renovated homes as soon as they’re ready for sale.

Investors could find renewed interest in neighborhoods where vacant or outdated homes can be rehabbed and returned to the market faster. Van Soest says the current rule doesn’t account for investors who complete legitimate renovations, including permitted electrical, plumbing or structural improvements.

But removing the rule wouldn’t create new homes. It would mostly give FHA buyers quicker access to recently renovated properties. With more buyers competing for the same renovated entry-level homes, prices could rise.

“More access does not automatically mean more affordability,” says Harris. “If a wave of newly eligible FHA buyers chases a still-limited supply of renovated entry-level homes, you could see price pressure in that specific segment.”

Even without the 90-day rule, FHA loans require an appraisal and lender underwriting and must meet FHA property standards. Those protections can help reassure buyers that the home is appropriately valued and meets minimum standards, but they don’t verify the quality of renovations. Homebuyers should still obtain a detailed home inspection.

“An FHA appraisal tells you what a home is worth. It does not tell you what you are actually buying,” says Harris. “Fresh paint and new flooring are easy. Nobody lists the HVAC on the listing sheet.”

Harris recommends that buyers ask for renovation details before making an offer on a recently flipped home, and understand that new isn’t the same as fixed. She says to find out exactly what changed, and that it’s a red flag if you can’t get a clear answer.

“Insist on an independent home inspection focused on the major systems: roof, HVAC, electrical, plumbing, drainage and foundation,” says Harris. “Those are where a rushed renovation hides.”