Property Flips
I wanted to go over a topic that I am seeing more and more of each day. Given the number of investors in the real estate market now, more properties are being sold where the seller has owned them less a year. And as the housing industry continues to struggle and investors are jumping in with both feet, I think it is safe to say that this trend is going to continue.
So, if you have a contract that is accepted in this situation what is the first thing you should do? TELL YOUR LOAN OFFICER THAT THE PROPERTY HAS BEEN TRANSFERRED IN THE LAST TWELVE MONTHS. This is really important because depending on the type of financing the buyer is using, it will affect what type of documentation is required to document the increase in value from the time the property was originally purchased to the time of the resale. Here is an overview of the documentation requirements based on the financing type:
Conventional Financing
Although there is nothing concrete in the Fannie Mae/Freddie Mac guidelines concerning property flips, banks do put overlays in their guidelines. Remember, the property is serving as the collateral for the bank to lend money and they want to make sure that the customer is protected along with the bank. So, they will require two appraisals to validate the value of the property. Although, it is not a requirement I also like to collect any invoices/receipts for repairs that were made to the property so that when the underwriter reviews the file, they get a warm and fuzzy feeling!
FHA Financing
FHA is very specific in their guidelines when it comes to property flips. There are two sets of guidelines though, one for if the property has been owned for less than 90 days and the other if the property has been owned less than a year. If the property has been owned less than a year, they will require two appraisals and again, I like to collect anything that will help substantiate the increase in value to the home. Now if the property has been owned for less than 90 days, they will still require this information but they also add a 3rd party lender home inspection. This means that the lender has to order a separate home inspection than the one that was done for the buyer after the contract ratification. And any repairs on that home inspection have to be done prior to closing.
VA Financing
This is by far my favorite type of financing when it comes to properties that have been owned for less than one year. VA has no guidelines when it comes to property flips. They will go with the value that their VA appraiser assigns to the property and require nothing else!
Hopefully, this will help you understand the requirements a little bit better as it relates to property flipping from the lending side. The devil is always in the details and I am a firm believer that you work out the details at the beginning of the process, not at the end!
As always, if you have any questions or need a buyer prequalified, please feel free to contact me at anytime.
Tammi Lewis
Senior Loan Consultant
1st Mariner Mortgage
NMLS ID# 455836
Cell#: (410)725-9451
Fax #: (443)296-9132
Buying or Selling a Home in Northern Virginia? Contact Kim Darwaza of RE/MAX Allegiance for all of your Real Estate needs at 703-856-2254 or kim@kimdarwaza.com. To search the MLS please visit http://www.kimdarwaza.com.