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Sunday, January 17, 2010

FHA Rule Change Helps First Time Home Buyers


The majority of the home sales in depressed real estate markets like Phoenix, Southern California, Las Vegas, & Florida are lender owned properties. The deluge of foreclosures in those markets has greatly increased the number of home sales as lenders take ownership, and then sell those homes. That increase in sales is good news for those of us whose livelihood depends on homes being bought and sold. But let's look at who is buying those foreclosures. A great number are investors.

Investors Role Important
I have been critical of the large number of home sales in our markets where the new owner is an investor. My argument is that true stability in the housing market can only come from homeowners who intend to occupy the properties. Investors that intend to flip properties only contribute to a bubble that will eventually pop after being over-inflated. However, even I must admit that investors play an important role in rebuilding our market.

That role involves the remodeling and even rebuilding of homes. Unfortunately many of the homes that lenders foreclose are in terrible shape. Prior owners often strip homes of appliances, fixtures, counters, cabinets, wiring, plumbing, and anything else that seems valuable. Homes are even damaged out of spite as angry occupants move out.

The average prospective home buyer cannot afford to make the repairs needed to make the home habitable. First time home buyers are typically scraping together savings to afford a minimum down payment. Investors have the funds to pay cash for the properties and make the necessary repairs. After the investor's work is through, the home is in move-in ready condition. They list the property and sell it to a willing buyer.

90 Day Seller Seasoning
Most home purchases today are financed with an FHA insured mortgage. However FHA rules require a seller to own the property for at least 90 days before a buyer can use an FHA to finance the purchase. Most of the time, the investor can make the necessary repairs to a home in a few weeks. So they were required to hold the property, unoccupied for an extra couple of months before they could sell to an FHA buyer.

On Friday FHA announced a temporary waiver of the 90 day rule. Investors, and any seller for that matter, can now sell the property immediately. There are some restrictions.
  • The waiver begins February 1, and lasts for one year.
  • Sales must be arm's-length transactions.
  • Restrictions apply to sales that increase by 20% or more.
More information can be found in HUD's press release.

This is good news for markets that need lender owned properties to turn over. It will motivate more investors to purchase and repair distressed properties, and get them into the hands of homeowners that will live in these homes.

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