Investor Property Flipping, Seller Seasoning and Home Loans

by benborden

There is a new, old bad word among lenders now and that is property flipping concerning seller seasoning. The current lending crisis has led to seller seasoning becoming more of an issue among buyers, lenders, investors and brokers. Seller Seasoning refers to the length of time a seller has owned a property or been on title of the property. Property flipping is when an investor buys a property and turns around and immediately sells it. Immediately, by lenders definition is within 12 months.

There are 4 types of lending entities, each with their own flipping guideline.

•    FHA (Federal Housing Authority)
•    Conforming (Fannie and Freddie)
•    VA (Veterans Administration)
•    Hard Money (Kinda like getting a loan from Shady Frank but not to be confused with Barney Frank, although close.)

Now HUD defined property flipping with the original letter as “the practice whereby a property recently acquired is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.”

In 2006 HUD loosened FHA’s flipping policy to 2 versions, 90 days and less and a 91 – 360 days.
According to FHA guidelines, FHA will only insure a loan on a property sold within 90 days if the seller is HUD, a Government Agency, a Federally Chartered Bank, a Non Profit or a relocation company. AFTER 90 days to 6 months, FHA will require a 2nd appraisal if the purchase price is 100% above the sellers purchase price and also, this appraisal cost can not be paid by the borrower.

Additionally, up to 12 months, FHA can require additional documentation to “support the resale value if the resale price is 5 percent or greater than the lowest sales price of the property.”

*For more information see FHA MORTGAGEE LETTER 2006 -14

Conforming (Fannie and Freddie) has no seller seasoning requirement

VA (Veterans Administration) has no seller seasoning requirement

Fannie, Freddie and VA have no “seller seasoning” requirements, although each lender I can assure you does. Most lenders are 12 months, some are 6 months and at the very least 1 or 2 will be 90 days. This is called Risk Overlaying.

Risk Overlays … Lenders may impose additional conditions to further insulate themselves from the possibility that they may have to buy back the loan. Risk overlaying not only applies to seller seasoning but every other loan underwriting guideline as well. As a Buyer, seller, Realtor you have to be very careful….just because there is a DU approval DOES NOT MEAN the lender will fund the loan. I can not stress this enough. The biggest overlays right now are credit scores and debt ratio’s but there are many more. Buyer beware.

Do your due diligence find out prior to submitting an offer how long the seller has been on title. If its less than 90 days save yourself the trouble unless of course it qualifies for the FHA exception. If you don’t, your lender will not find out till the appraisal is done that the title has transferred and then your into the transaction for $350-$400 and a lot more in wasted time.

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