You want to make a deal on a house, turn it around and turn a profit. You know you need to get a loan to make it happen. Wait.
Did you know that if a buyer’s contract of sale is dated within 90 days of the seller’s deed, the buyer may not be able to get a mortgage commitment? Underwriters at mortgage lenders have policies against issuing loans when the dates between the prior deed and the current contract of sale are too close in time.
Specifically, underwriters believe that when a contract of sale is within 90 days of the seller’s recently acquired deed, the seller may be attempting to obtain significant profit through utilizing a misleading or fraudulent appraisal that contains an artificially inflated property value to steal money from the lender. The profit is thought not to reflect a true retrofitting of the property with a real increase in fair market value as the result of effort and skill, but, instead, the profit is thought to reflect an elaborate and fraudulent scheme where a corrupt buyer, seller and appraiser are working in cahoots to steal money from the lender. That is the reason for lenders adherence to the so-called anti-flipping rules, which prohibit a loan where the deed is dated within 90 days of the contract of sale.
While some lenders can have tailored rules with exceptions to this 90 day anti-flipping policy, for loans within their portfolio program (that is, when the lender keeps the loan and doesn’t sell it on the secondary market to Fannie Mae or Freddie Mac), lenders have to be very careful with conventional loans (those sold to Fannie Mae or Freddie Mac) because of B4-1.1-02: Lender Responsibilities. B4-1.1-02 sets forth the rules to determine whether the loan is marketable to Fannie Mae or Freddie Mac on the secondary market. Specifically, B4-1.1-02 sets forth, in vague terms, that “the lender is responsible for ensuring that the subject property provides adequate collateral for the mortgage.”
For most loans, Fannie Mae requires that the lender obtain a signed and complete appraisal report that accurately reflects the market value, condition and marketability of the property.
Some loans may be eligible for an appraisal waiver, and an appraisal is not required if the lender exercises the waiver and complies with the related requirements. (See B4-1.4-10, Appraisal Waivers, for additional information.) Lenders have taken this requirement of adequate collateral to impose, at least initially, a requirement that at least 90 days have elapsed from the seller obtaining the deed prior to the contract of sale being executed.
Even more extreme than a conventional loan is an FHA loan, which prohibits, without exception, any loan to a borrower who executes a contract of sale within 90 days of the prior deed to the seller by way of 24 CFR §203.37a. Similarly, VA loans have this 90 day rule, but unlike in an FHA loan, a VA loan provides for exemptions with additional documentation and conditions being placed on the borrower.
Sellers and borrowers alike should be mindful of this 90-day rule when entering into a contract of sale. Real estate brokers and attorneys should not permit their clients to sign a contract of sale when it is within dated 90 days of the prior deed if contingent on a mortgage or a loan will be issued to pay the sales price.
Yes, there are exceptions to this rule. However, the exceptions, like having a high credit score on a portfolio loan or proof of the retrofitting by the seller, aren’t worth the risk assessment to a buyer who can be held in default for failing to close on their contract of sale while relying on the invisible underwriter to make a determination as to risk worthiness.
As you can see, it’s a good thing to know a little something called the law.
Andrew M. Lieb, Esq., MPH, is the managing attorney of Lieb at Law P.C. and a contributing writer for Behind the Hedges.