Many people do not realize when they are buying a property that has been "flipped". What does "flipped" mean? To me it means that a real estate investor bought a house that was run down, and did some renovations, and sold it quickly, without holding it for the long term. Why this matters is that when getting an FHA loan, FHA says you need a 2nd appraisal when buying a flipped property.

I asked a bank representative that I broker loans to, to help me define what FHA sees as a "flipped property", and here was his reply:

"Here are the requirements regarding property resales direct from our FHA product guidelines:

Property Flipping: Property flipping is a practice whereby a property recently acquired is re-sold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser. To address the issue of property flipping, FHA has placed certain time restrictions and additional documentation requirements on purchase transactions involving the resale of an existing property.

Property Eligibility: Property eligibility is dependent upon the time that has elapsed between the date the seller acquired the property (based on the settlement date) and the date the buyer signed the sales contract or purchase offer (the resale date).

Resale Less Than 90 Days: This property is not eligible for an FHA loan if the resale date is 90 days or less following acquisition by the Seller. The contract may be written on the 91^st day from the date the current owner acquired the property).

Resale Greater Than 90 Days: 91-180 days: 2 appraisals will be required if the sales price is 100% or greater of the seller’s acquisition cost. And the cost of the second appraisal may not be charged to the homebuyer.

181-360 days: 2 appraisals may be required at underwriter discretion."

So you can see that FHA and banks use "flipping" with a negative connotation, and believe that fraud is usually associated with quickly selling properties after purchase and renovations, hence the 2nd appraisal.

At this point a 2nd appraisal and the above time requirements are not a requirement on Conventional or VA loans for "flipped" properties.

If a property is in good condition, you like it, and you believe it is worth what similar properties in the area are, then feel comfortable making an offer and do not worry about fraud. But do realize why FHA wants a 2nd appraisal to double check value.

Last week the House of Representatives passed a bill giving HUD the OK to increase the monthly mortgage insurance on FHA loans to 1.55% from the current .55%. Huh? This is really extreme, and to me is akin to FHA taking itself out of the market! The losses must be so steep at FHA that they simply can't handle much more volume.

FHA, during the real estate boom of 1999-2006, was used sparingly. Buyers seemed to have lots of money, sellers did not like dealing with FHA loans, and as a result it was probably responsible for less than 5% of our marketplace. After the real estate market changed, use of FHA loans spiked, and now may account for 40% of local loan volume. And it has been said that FHA has been the dumping ground for poorly qualified buyers, since there are no sub-prime loans anymore, so I can understand why the losses are mounting at FHA.

This new bill will significantly increase a borrower’s monthly payment. I'll give you an example:

Let's assume a home with a sales price of $500,000.

Under current FHA guidelines, the monthly mortgage insurance would be $221/month.

Under the new proposed rules the payment would be as high as $623! This is the same thing as increasing the mortgage rate from 5% to over 6.25%.

$221/month in mortgage insurance cost was bad enough, NO ONE will pay $623/month, NO ONE. And effectively, we can all wave bye-bye to FHA loans if this bill passes.

FHA recently raised their up-front mortgage insurance premium (this is financed into the loan, and is paid on top of the monthly mortgage insurance cost) by .50%, from 1.75% to 2.25%. That I understood, and I thought that was the solution to replenish the insurance fund to keep FHA in the black. I guess that was not anywhere near enough…

The government is taking away the punch bowl at the wrong time, in my humble opinion. Maybe they could take some more punch out of the bowl, but they have effectively knocked the bowl off the table with this move! We'll see what happens with this legislation, and I'll comment on it again as needed.

If you have an FHA loan, you have probably heard you can do an FHA streamline refinance. This FHA loan is a type of refinance where you can refi without an appraisal. It used to be very easy to do. In the past, you could refinance your loan, drop your rate, wrap in all the closing costs, and all of that could be done with no appraisal, no credit report, and for the most part no paperwork.

However, last year FHA changed the rules. Now, if you want to do an FHA Streamline refi and you want to wrap in the closing costs, you need to get an appraisal. If you want to waive the appraisal, you have to pay your closing costs out of pocket.

The problem is that people that used an FHA loan mostly put down the minimum down payment (which was 3% down, now is 3.5% down), and their house is likely worth less than it was when they bought it.

So, if you get an appraisal in this situation, the loan may be denied because the house won't appraise for enough. And if you want to waive the appraisal because you know it won't appraise, then you have to pay all of the refinance closing costs (to the title company, lender, appraiser, etc) out of pocket, and a lot of people do not have that cash to spare.

A lot of people with FHA loans end up being stuck unable to refinance, because of the above situation. I hope FHA changes the rules back (unlikely any time soon) so that more people with FHA loans can cheaply refinance when/if rates drop.

The FHA is reeling from rising defaults in its mortgage business. By law the agency must set aside 2% cash to deal with unexpected losses. As of September 30, those reserves had dropped from almost $13 billion to just over $3.6 billion. This total represents only one-half of one percent of all outstanding single-family-home loans insured by the FHA, the first time since 1994 that it has been this low.

At a hearing before the House Financial Services Committee last week, HUD Secretary Shaun Donovan told the members that his agency has not done a very good job in managing the housing crisis. The FHA’s share of mortgages is 30 percent of all mortgage origination (and rising) and 20 percent of loan refinancing.

How do FHA authorities propose to turn things around? According to a senior HUD official there are several options under consideration.

First, the FHA has identified “abusive lenders” and suspended business with seven of them and withdrawn its approval for 270 others. Lenders that make FHA insured loans will face stiffer restrictions to keep the abusive lenders from financing risky borrowers.

Currently, the borrower is required to have a minimum down payment of 3.5 percent. Legislation has already been introduced to increase that to 5 percent.

Sellers may now kick in a maximum 6 percent of the home’s value towards the buyer's closing costs; it has been proposed to lower that to 3 percent.

Monthly mortgage insurance premiums may be raised. This is currently under review.

The minimum credit score will be raised. It has not yet been decided what the new minimum score will be.

The FHA has asked Congress to give it more power to close down abusive lenders. It is also working on mandating that banks they do business with have up to $2.5 billion in capital, instead of the current $250,000 to repay the agency if a bank is found to be involved in fraudulent dealings.

On the one hand, it is going to cost more for a l0t of people who don't have extra cash, to get an FHA loan.  Which is too bad since the home buyer credit has been extended and this could be a great market for buyers.  On the other hand, FHA has to make sure buyers are sound, and they need to get rid of the 'abusive lenders' who are conning people into mortgages they can't afford. If they don't, the taxpayer will be on the hook for even more!

Making guidelines stricter may make it harder for buyers in the near term, but it may make for a more stable housing market in the long run.

FHA loans are federally backed loans insured by the Federal Housing Administration. FHA loans are traditionally used by buyers who cannot come up with the larger down payments required on a Conventional loan (which are normally 5% down to 20% down). FHA loans were typically used more by lower to moderate income buyers, however, that has all changed recently.

The program started during the Great Depression of the 1930s, when the rate of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance to encourage them to lend.

FHA loans fell out of favor during the real estate boom of 1998-2006, as sellers did not want to be exposed to the more marginally qualified buyers that were usually attached to an FHA loan, nor did they want to hassle with the more stringent appraisal requirements of an FHA loan.

However, in a buyer's market, FHA loans are now commonly accepted in most markets, and FHA loans have become a savior for many home buyers, and the real estate and mortgage industry in general. If it were not for the FHA loan, many real estate transactions would not occur.

FHA loans have more relaxed underwriting standards, below is a sample:

-credit scores as low as 620 are acceptable (for a Conventional loan a 720 is preferred).

-a down payment as small as 3.5% is acceptable (for a Conventional loan 5% to 20% is required).

-in high cost areas an FHA loan can go as high as $625,500, just like a Conventional loan.

-on an FHA loan the seller can pay all closing costs (this is also usually the case on most Conventional loans).

-with an FHA loan all of the 3.5% down payment can be a gift from a family member (whereas on a Conventional loan you must have at least 5% of your own savings into the transaction).

-co-signers are OK on an FHA loan (they are usually not OK on a Conventional loan).

-Lenders can still order from appraisers they know and have a relationship with on FHA loans (not so on Conventional).

-On an FHA condo loan FHA requires that 51% or more of the condo building be occupied by primary residents versus tenants (on a Conventional loan that figure can be as high as 60% to 70%), but the condo must be on the FHA approved list.

-The underwriting guidelines in other ways are generally more flexible on an FHA loan, than any other.

As a buyer if any of the above is appealing or fits your financial circumstances then an FHA loan is worth looking into. If you are a seller, being open to an FHA loan will help you sell your property.