Details on FHAs new Seasoning Rules‏

New FHA guidelines were issued on January 15 that is the best news yet to Short Sale Investors. The guidelines remove the 90 day seasoning requirements for Investors to gain clear title before a sale can take place to a new buyer who is being financed with an FHA loan. The waiver on the old guidelines takes place as of February 1.

There are several requirements outlined in the guidelines:

1. No multiple transactions on the chain of title within a 12 month period. This means one Investor cannot assign a contract to another Investor or to a different entity before the end Buyer transaction occurs.

2. There may not be more than 20% profit built into the deal without jumping through additional hoops. If more than 20% is warranted, then there must be a second appraisal, documentation pointing to extensive repair and renovation needed, including an inspection report. Inspection reports must include the main structural elements of the house and the main mechanical and electrical elements. Inspections must cover both exterior and interior condition, insulation, ventilation systems, fireplaces and other fuel burning appliances.

Even with a low end property, however, 20% yields a fairly decent profit, especially when you are just starting out in investing. On a $50,000 house the maximum profit without further justification can be $10,000, while on a $200,000 house the built in maximum can be $40,000. You can see how dramatically profit will vary just by increasing the value of the property that you go after in the Short Sale marketplace. Still, the new ruling makes it profitable and simpler to go after low end deals and to put first time Homebuyers in place with these transactions than before when FHA buyers were out of the question. The Homeowners will no longer be forced to wait for lengthy seasoning periods, and therefore fewer deals will fall through.

3. As in the past, all FHA transactions must be “arms length.” Do not try to transact a Short Sale flip with a relative or close associate.

4. The Seller must hold title to the property. Make sure that the A to B transaction closes completely with separate funding, and that the sale is officially recorded. For this reason, it still may not be possible to do a same-day closing with end Buyers with FHA loans; there may need to be a few days to get the deed recorded before the second transaction can take place.

5. Make sure that you are investing within an LLC or corporation that has been fully recognized and is legally set up. Do not try to invest using a DBA. FHA does recognize trusts, if legally set up, but we highly recommend that you use an LLC or corporation as your legal base for your business.

6. The deal must have been marketed. The FHA will recognize deals that were marketed publically through the MLS, an auction, FSBO service, or through a developer.

The original set of exemptions to the FHA’s 90 day rule were for REOs and other properties owned by state and federally chartered financial institutions and single family homes in revitalization zones. Those who inherited properties were exempt, as were certain non-profit corporations. Relocation agencies also fit within the original narrow scope of those organizations exempt from the original FHA rules.