How HUD's Anti-Flipping Rule Protects Homebuyers

Federal Rule Protects Against Artificially Inflated Home Prices

A rundown, vacant house in Mississippi
HUD Program Helps Buyers Get ‘Fixer’ Homes. Tim Graham /Getty Images

In May 2003, the U.S. Department of Housing and Urban Development (HUD) issued a federal regulation intended to protect potential homebuyers from potentially predatory lending practices associated with the process of "flipping" home mortgages insured by the Federal Housing Administration (FHA).

Thanks to the rule, homebuyers can “feel confident that they are protected from unscrupulous practices,” said then HUD Secretary Mel Martinez.

“This final rule represents a major step in our efforts to eliminate predatory lending practices,” he said in a press release.

Abusive home "flipping" occurs when a property is resold for a large profit at an artificially inflated price immediately after being acquired by the seller with little or no appreciable improvements to the property.  According to HUD, the predatory lending happens when unsuspecting homebuyers either pay a price far higher than its fair market value or commit to a mortgage at unjustly inflated interest rates, closing costs or both.

Not to Be Confused With Legal Flipping

The term “flipping” in this instance should not be confused with the completely legal and ethical practice of buying a financially distressed or rundown home, making extensive “sweat equity” improvements in order to truly raise its fair market value, and then selling it for a profit.

What the Rule Does

Under HUD’s regulation, FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs,” recently flipped homes are not allowed to qualify for FHA mortgage insurance.

In addition it allows FHA to require persons attempting to sell flipped homes to provide additional documentation proving that the home’s appraised fair market value had truly increased significantly. In other words, prove that their profit from the sale is justified.

Highlights of the rule include:

Sale by Owner of Record

Only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for the loan; it may not involve any sale or assignment of the sales contract, a procedure often observed when the homebuyer is determined to have been a victim of predatory practices.

Time Restrictions on Re-sales

  • Re-sales occurring 90 days or less following acquisition will not be eligible for a mortgage to be insured by FHA. FHA's analysis disclosed that among the most egregious examples of predatory lending was on "flips" that occurred within a very brief time span, often within days. Thus, the "quick flips" will be eliminated.
  • Re-sales occurring between 91 and 180 days will be eligible provided that the lender obtains an additional appraisal from an independent appraiser based on a re-sale percentage threshold established by FHA; this threshold would be relatively high so as to not adversely affect legitimate rehabilitation efforts but still deter unscrupulous sellers, lenders, and appraisers from attempting to flip properties and defraud homebuyers. Lenders may also prove that the increased value is the result of rehabilitation of the property.
  • Re-sales occurring between 90 days and one year will be subject to a requirement that the lender obtain additional documentation to support the value to address circumstances or locations where HUD identifies property flipping as a problem. This authority would supersede the higher expected threshold established for the above-mentioned 90 to 180 day period and will be invoked when FHA determines that substantial abuse may be occurring in a particular locality.