FHA 90-Day Rule: A Comprehensive Guide

Definition: The FHA 90-Day Rule is a regulation established by the Federal Housing Administration (FHA) to prevent predatory practices in real estate, particularly in property flipping. The rule mandates that a property must be owned by the seller for at least 90 days before it can be sold to a buyer using an FHA-insured loan. This rule helps ensure that properties are not resold at inflated prices within a short period, protecting both the buyer and the FHA from potential financial losses.

Historical Context: The FHA 90-Day Rule was introduced to combat fraudulent practices that became prevalent during the early 2000s, where properties were bought and quickly resold (or "flipped") at significantly inflated prices. These practices often involved minimal or cosmetic repairs and aimed to exploit buyers and lenders. By enforcing a 90-day holding period, the FHA sought to ensure that property values were stabilized and that buyers were protected from overpaying for homes that had not appreciated in value genuinely.

Why the Rule Exists: The primary purpose of the FHA 90-Day Rule is to protect homebuyers from being taken advantage of by developers or investors who might sell a property for more than its actual market value shortly after purchasing it. The rule also helps maintain market stability by ensuring that properties are sold at prices that reflect their true value, rather than inflated figures driven by quick turnovers.

How It Works:

• 90-Day Ownership Requirement: A property must be owned by the seller for at least 90 days before an FHA-insured loan can be used to purchase it. The 90-day period begins from the date the seller officially acquired the property (as recorded on the deed).
• 91-180 Day Period: If the property is sold between 91 and 180 days after acquisition, additional scrutiny is required. Specifically, a second appraisal may be necessary if the resale price exceeds 100% of the purchase price. The second appraisal ensures that the property’s value increase is justified and not artificially inflated.

Exceptions: Certain situations are exempt from the FHA 90-Day Rule, including properties sold by government agencies (like HUD), properties in federally declared disaster areas, and homes acquired through inheritance.

Examples of Rule Violation: A common violation of the FHA 90-Day Rule occurs when an agent lists a property as eligible for FHA financing within 90 days of its last sale. For example, in one case, an agent advertised a property as being FHA loan-eligible when, in reality, the seller had owned the property for less than 90 days. A buyer, believing the property qualified for FHA financing, entered into a contract and paid earnest money, only to discover later that the property was ineligible, causing financial loss and legal complications.

Best Practices for Compliance:

1. Verify Ownership History: Before listing a property, always verify the seller's date of acquisition to ensure compliance with the 90-day rule.
2. Clear Communication: Disclose any restrictions related to financing options in the MLS and directly to potential buyers.
3. Use Accurate Advertising: Ensure all marketing materials accurately reflect the property’s eligibility for FHA financing.

Conclusion: The FHA 90-Day Rule is an essential regulation in the real estate industry, safeguarding both buyers and the integrity of the market. By understanding and adhering to this rule, buyers, sellers, and agents can navigate transactions more effectively, ensuring that properties are sold at fair market values and that all parties are protected from potential risks associated with quick resales.