Investor + Flippers Guide to FHA Flipping Guidelines

Federal Housing Administration (FHA) loans are becoming an increasingly popular option for buyers all across the home market. And as home prices have climbed higher than ever in the past three years, many prospective homeowners are turning to FHA loans due to the increased assistance and down payment requirements they offer.

However, property investors and house flippers can run up against the requirements for FHA loans in ways that present unexpected obstacles. The FHA flipping guidelines change who you can sell to, how you can sell, and even the terms you need to comply with to buy some investment properties.

Whether you’re an experienced flipper or you’re just thinking about getting into the house investment market, you’re going to encounter FHA loans more often. This guide will help you navigate the market more knowledgeably by covering:

• The challenges of using FHA loans to purchase investment properties
• The challenges of selling flipped houses to buyers who are pre-approved for an FHA loan
• How you can profitably sell your properties while complying with FHA flipping guidelines on both sides of the equation
• Some best practices for making sure your investment strategies pay off

FHA Flipping Guidelines on the Investor Side: The Challenges of Using FHA Mortgages as an Investor/Flipper

At first glance, the relationship between FHA-insured mortgages and potential investment properties seems clear: you simply can’t use FHA loans to buy an investment property. These loans, insured by the Federal Housing Administration (FHA) and designed to help homebuyers with low credit scores and low down payment savings, are generally off the table for anything besides a primary residence. 

However, some savvy buyers who want to become real estate investors in the future can get some value out of them by:

• Purchasing a property with an FHA loan that they may one day rent out
• Buying a fixer-upper to live in as they “flip” it during their free time
• Purchasing a small multi-family property, such as a duplex, so they can live in one unit and rent or flip the other side

These approaches can give you access to favorable FHA loans, but they won’t give you access to the typical quick transactions that house flippers prefer. Some of the clearest obstacles to these and other strategies are:

• FHA loans must be for primary residences; trying to skirt this requirement (which ties to the spirit of FHA lending) can cause problems down the line.
• The property must fall within county FHA loan limits, which can decrease your access to potential investments.
• The housing unit must meet FHA minimum property standards and pass FHA appraisal; if you want to put serious work into structurally run-down properties to collect a hefty return, you might not be able to use an FHA loan.
• The sale must be in your name or a trust’s name, not an LLC or business.

Related: Should You Get a Real Estate License to Flip Homes in Texas?

It’s not impossible, but it requires a lot of planning. Later in this article, we’ll explore some potential approaches in more detail.

FHA Flipping Guidelines on the Seller Side: The Challenges of Selling to Buyers Who Are Pre-Approved for an FHA Mortgage

As a house flipper, you don’t just have to worry about FHA flipping guidelines during the buying process; as the seller, you also have to be ready to accommodate the requirements of FHA-approved borrowers. The FHA has put protections in place that help buyers navigate potentially predatory scenarios, especially house flippers who provide cosmetic finishes that cover up more costly structural and safety issues in a home. 

This presents three main challenges for property investors trying to sell a flipped home to a buyer using an FHA loan:

1. They have to wait at least 90 days since originally purchasing the property to sell it. Buyers who are pre-approved for an FHA loan must comply with the FHA 90-day flipping rule. Under this rule, buyers can’t purchase a flipped home that the flipper has owned for fewer than 90 days. The mortgage lender will generally decline to approve the mortgage until 90 days have passed.
2. There must be a second appraisal (handled by an FHA-approved appraiser) on the property if the sales price is higher than what the flipper paid for the home. The buyer cannot pay for the second appraisal, which means the $300–$400 bill falls on the seller. 
3. There are additional documentation checks, which can slow down the close and add bureaucratic costs to the entire transaction.

As an investor, the downstream implications of these challenges can be frustrating, equating to more time, delays, and expenses to bog down your business.

How to Make Your Flip Investment More Profitable While Complying With FHA Flipping Guidelines

However, this doesn’t mean that house-flipping becomes completely unprofitable. As long as you have a thorough understanding of the requirements and restrictions around FHA loans, you can create the right timelines and documentation processes to accommodate. Here are some quick insights on how to sell your flipped properties to both FHA buyers and non-FHA buyers.

How to Work With FHA Buyers

First, know the area before you buy a property. If you know your next investment is in a market with buyers that rely on FHA approval, consider these approaches:

Extend the Repair Timeline

Depending on how many homes you have in your pipeline, the 90-day rule might not even slow you down. Continuing supply chain and labor shortages mean 60-day flips may already need an extra month. Also, if you handle your own repairs as a general contractor or work with a small team, you can simply schedule repairs and renovations so everything falls into an orderly timeline. Look for properties with enough renovation needs to justify a three-month window.

Negotiate So the Buyer Pays for More Closing Fees

If you know you’re likely selling to a buyer with an FHA loan, then the second appraisal is going on your side of the closing fees. So communicate your expectations on the MLS listing: serious buyers should pay more closing fees and not be overly aggressive about negotiating down the price. Highlight the fact that the buyer is getting a newly renovated home and how that saves them time and frustration by purchasing a move-in-ready property. Setting this expectation early can make sure line item fees don’t eat into your profits.

Buy Properties With a More Aggressive Profit Margin in Mind

Ultimately, investing in a property that you will sell to a buyer with an FHA loan will cost you more money. That could be the appraisal bill, the added administrative fees of weeding through sub-par offers, or the holding costs for keeping the property the full 90 days. Calculate those costs from the start, and make sure your initial offer on the potential investment reflects those anticipated costs.

Related: Understanding Investment Property Closing Costs in Texas

If you do sell to someone with an FHA loan, you hit your target; if you sell to someone with a conventional loan, you make a little extra money.

Other Strategies

If the idea of dealing with FHA loans seems too frustrating to be worth it, you can also change your investment style. Consider:

Buy-and-Hold Investments (Especially Duplexes, Triplexes, and Quadplexes)

The FHA flipping guidelines only apply to flips. If you want to diversify your real estate investments, consider keeping a few promising properties as rentals. With small multi-family homes, you can even sell a couple of the doors and keep a few to experiment with the landlord role.

Prioritize Conventional Loan Buyers

You can also limit your pool to conventional loans and cash-only buyers. Make this stipulation clear in your listing terms. It may limit the number of offers you get but also simplify the process at the same time.

How to Navigate FHA Loans for Yourself

Investors can also use FHA loans for their own home purchases. However, you need to carefully navigate the requirements so you comply with FHA flipping guidelines and don’t trap yourself into holding onto unprofitable properties. Consider these approaches:

Try the “House Hacking” Approach: Buy a Quadplex or Smaller

A popular idea in the modern residential real estate investment market is house hacking—that is, buying a small multi-family property and living in one of the units yourself as you rent out, fix up, and sell the others. This is a great approach for FHA-approved borrowers. Because you’re using one of the units as a primary residence, you aren’t breaking FHA rules.

Focus on One or Two Properties

Many residential investors slide into real estate investing by buying a home, living in it for a while, and then selling or renting it. While this isn’t traditional house flipping, you can use this approach to fix up a property slowly over time and then sell it when you move onto a different home. However, you can only hold up to two FHA-insured mortgages at a time, so you can’t use this approach to quickly build a large portfolio or do a lot of fast flipping.

Be a Strategic Investor Who Can Navigate the FHA Flipping Guidelines Landscape

No matter what investment style appeals to you, being well-informed of FHA flipping guidelines and other rules surrounding flips, rentals, and investments is crucial. It’s just as important to make sure you have an eye on trimming down closing costs and expenses whenever possible. At ListingSpark, we give investors and flippers the tools they need with transparent fees so you can stay in control of the process. We provide:

• MLS listing services so you can list and sell properties without an agent (and without paying a hefty 3% agent commission)
• Reliable and cost-effective title services through SparkTitle
• A la carte marketing and house showing services based on your selling and investment style

Reach out today to see how you can cut expenses and expand your profits with our flat-fee options.