FHA rules on foreclosure purchases

Craig Bohall, Suburban Mortgage

Most professionals are aware of the FHA “90-day rule” to guard against home flips. If you are not aware, here is the word for FHA guidelines:

• FHA requires that a) only owners of record may sell properties that will be financed using FHA-insured mortgages. B) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing.

Plain English – If the buyer is buying a property and the seller has been on the deed less than 90 days FHA will not insure the loan for the buyer to buy the property (IN MOST CASES).

So are their exceptions to this rule… OF COURSE!

• Sales by HUD Owned property
• Sales that a seller acquired in an inheritance
• Sales of properties purchased by RELO companies
• Sales of properties by state and federally chartered financial institutions.

This last one is the most widely used exception. Many lenders are not even aware of the exceptions and simply tell clients to wait 90 days from when the seller was on title.

Professional lenders who have done their research are able to learn how FHA will give them the exceptions with the correct documentation and proof. This allows the buyer to purchase a home that was foreclosed and is owned by a bank within the first 90 days after the bank is the owner of record.

Also if the big bank is the owner but the contract is being written by "XYZ management company” who does all the contracts for the big bank… BE CAREFUL.  The sale must be by the owner of record! In other words you may have issues with XYZ company signing the contract when they don’t own the property.  Again check with a professional who has done many of these transactions so that you don’t get into trouble.

Be careful, you can’t submit a contract at the 60-day mark and expect to close after 90-days. FHA says that the contract must be dated on the 91^st day! NOT BEFORE.   Having said that, some good lenders have received “exceptions” on REO properties because they fall into the exceptions section of the FHA code.

FHA will give this exception when the current owner is a “federally or state charted financial institution.” Wells Fargo and Bank of America, Countywide are examples of banks that fall into that category.  Freedom Mortgage Corp LLC or John Doe’s Mortgage corp. LLC may have a license but not be chartered.  They will not authorize exceptions when the current owner is a:

• Private lender
• Non Federal or State Chartered institute
• Investment Group
• Private owner
• Company that buys up foreclosures and re sells them to the public

How could this affect you?

There is a whole lot more to know than that you love the home and you can get it for a great price. Working with a professional realtor in this market is a must unless you are a glutton for disappointment.

You must insure the seller is the owner of record for 90 days if you are using an FHA loan to buy the home. (some investors are adopting this 90 day period on conventional Fannie Freddie loans as well )  If not, you will have to wait until their ownership has seasoned 90-days. Fortunately, that doesn’t mean 90-days “on the market.” In other words, most lenders take between 5-30 days to get a property released to the listing broker. Make sure you check the tax records before submitting an offer and use professional realtors and lenders who have been around the block many times on these types of deals.

Comments

[Pam]

I was looking up the 90-day FHA rule on the internet and came across your page showing exceptions to the rule. I am trying to sell a bank owned property that the bank took back less than 30 days ago. I am only finding two exceptions to the 90-day rule within the HUD guidelines. They are relocation companies and HUD owned properties. Can you tell me where you found the other two exceptions you note on your website? Thank you for any assistance you can give me.

[Craig Bohall]

The “exceptions to the 90 day restriction” ruling are in the FHA guidelines - chapter 1 at the end of the chapter - section 106.

Pam,

There are actually eight official exceptions noted in the guidelines.

Ask your lender for that particular section and you should be good to go.
Relo’s and HUD owned are two of the exceptions there are others such as seller acquisition by inheritance that also is allowed and then the ones I mentioned.