Reasons Sellers May Reject Buyers With FHA Financing
There are a number of reasons why some sellers will reject offers from buyers with FHA financing:
- FHA requires certain types of repairs.
- FHA loans can sometimes take longer to close.
- FHA buyers can make a minimum down payment of 3.5% of the purchase price, and sellers tend to prefer larger down payments.
- The home must conform to FHA guidelines.
- FHA has lower credit score requirements than conventional lenders, so sellers worry that a buyer might not qualify through underwriting.
FHA Seasoning Requirements for Flipper Homes
FHA will not make a loan for a borrower who buys a home from a flipper within the first 90 days of title transfer. This means if an investor buy a home on December 1, FHA will accept only those purchase contracts dated after March 1.
A buyer cannot begin the loan process without a signed purchase contract. All FHA buyers should ask their real estate agents to find out when the seller acquired title to the property. Agents can look in the public records, examine the tax rolls or ask a title company for this information.
Conventional Seasoning Requirements for Flipper Homes
Lori submitted an offer proposing conventional financing with 25% cash down at list price. Because it was not FHA financing, her offer was accepted, and she beat out the other three buyers. However, 3 weeks later, her loan was rejected by the conventional lender. Lori's appraisal came in 7% higher than the sales price, too. She was devastated.
New conventional guidelines now require the same amount of seasoning, holding period, as FHA. The sellers bought this home as a foreclosure at a trustee's auction at a much lower price than the amount Lori paid. Lori, however, still paid under market value. She did not know the sellers were flipping the home because title had not yet transferred.
The sellers did not record the deed that placed title into their name until the day after they had signed the purchase contract with Lori. This mean that Lori's lender would now require a 90-day waiting period, at which point, the lender would ask for a new contract.
Interestingly, the sellers could not sell to any other buyer utilizing conventional or FHA financing now, which gave Lori a slight advantage. At the 11th hour, Lori lucked out and was able to find an investor who handled conventional products to fund her loan. But by the time you read this, it is highly unlikely that you will be able to find such financing anywhere in the country.
Avoiding Financing Seasoning on Flippers
To be safe, confirm when the seller obtained title before you write an offer, especially in neighborhoods populated by foreclosures. If title transferred within the past 30 to 60 days, you might not want to wait out the 90-day seasoning period.
In fact, it's good practice to simply ask the listing agent if the home is a flipper, because recordation of the deed could be delayed, as it was in Lori's case. If all else fails, another option is to negotiate early buyer possession on a month-to-month rental and wait out the 90 days.
Lending guidelines are constantly changing. Don't automatically assume that what was true today will be true tomorrow.
