Understanding "title Seasoning" And How It Affects Fha Financing
A real estate "flip" is when a property is bought and resold quickly. There are simultaneous flips, when the purchase and resale happen on the very same day and there are longer flips, such as when a property is purchased, rehabbed and later resold.
Flips are typically performed by real estate investors and speculators. They got a bad rap during the housing boom. Real estate was in such demand that contract flips became commonplace. This is when a speculator doesn't even take title to the property - he simply sells the contract.
Say you sign a contract to purchase a property for $200,000. You find someone that is willing to pay $220,000 for the home. You could go to closing with the seller and then immediately close again with your buyer. That's called a double close or simultaneous close. But there would be two sets of closing costs. To avoid that, a speculator could sell the $200,000 contract for $20,000. That gives the new buyer the right to purchase the property for $200,000. He paid $20,000 for that right so his total investment becomes $220,000.
Lending institutions no longer permit contract flips due to the frequency of fraudulent transactions within these types of transactions. You can buy or sell a flip with private financing but this is a blog about FHA financing so I will get to the point.
Title seasoning pertains to the length of time that a seller of a property was the owner of the property - how long they "held title". In a flip transaction, title seasoning is very short. Lenders don't like that. But lenders also understand that legitimate flips do occur such as when a property in disrepair is rehabbed and then resold.
In order to obtain FHA financing on a home you wish to purchase, there needs to be a 90 day period between the day the seller took title to the home and the date of your purchase contract.
Many real estate agents and attorneys are unaware of this. Before you sign a contract to purchase a home, you should find out everything there is to know about the property. Most counties have either a property appraiser's office or a property tax office. These offices usually will have a website where you can look up the property you wish to purchase. Go to Google.com and type in "Your County Property Appraiser" or Your County Property Tax". You'll find it. Then search for the property by the address... you should be able to find it fairly easily. Read the entire report.
In the event that the county records indicate a different seller than the one you are dealing with, that may indicate that your sellers purchase transaction has not yet been recorded. This could mean that 90 day title seasoning has not yet occurred.
There are two situations where this rule contains exceptions. The first is on properties that were foreclosed and are now being sold by the foreclosing institution or if the property was acquired by an institution through a bulk purchase of foreclosed properties. The second is in Federal disaster areas.
It's very important to do your due diligence on any property you are interested in purchasing so that problems don't arise after a contract has been signed.
by: Ron Borg