Property flipping is a practice where a property was recently acquired by an investor and is sold for a considerable profit within a short period of time. Many lenders have title seasoning requirements for homes that are being flipped by investors. Lenders have specific guidelines that must be met before they will originate a mortgage for a prospective borrower.
Most lenders will require a seller to have ownership a minimum of 60 days before a buyer can obtain a mortgage for the subject property being flipped. Additionally, a desktop appraisal review will be required to further audit the initial appraised value of the home if the seller has not been on title of record for 90 days.
Additional requirements need to be met depending on whether borrower is applying for a conventional or government loan. A conventional mortgage has additional requirements if the sales price of the property is 20% more than the seller’s acquisition costs. The increase in value must be justified with supporting documentation verifying the seller has completed sufficient renovation and repairs to justify the increase in value. If no significant renovations were completed, the appraiser must provide a detailed explanation of the increase in property value since the prior title change.
Government loans have additional requirements depending on whether the sales price is greater than 20% over the seller’s acquisition cost. If the resale occurs within 0-90 days, the new sales price must be less than 20% over the seller’s acquisition cost. The number of days is calculated from the recording date of the deed to the purchase contract date of the new contract.
If the sales price is greater than a 20% increase over the seller’s acquisition, the sales transaction must occur more than 90 days if borrower is obtaining a government loan. There are additional requirements where a second appraisal may be required.
Additionally, the transaction must be an arms length transaction for both government and conventional loans. There can be no identity of interest between the buyer and the seller or any other parties involved in the sales transaction.
These are general guidelines that most lenders follow and can change any time. Lending requirements have become much more stricter the past few years. If you are considering purchasing a home that has recently been flipped by the seller, please check with your Realtor or loan officer before submitting an offer and completing a mortgage application. Otherwise, you could lose costs incurred for ordering an inspection, survey, and appraisal if the timeline is discovered late the sales closing process.
If you have any questions, please call us at 512-257-9836. Our office provides sales, leasing, property management, and mortgage services.