Can you use FHA loan for the purpose of flipping ?

6 Replies

Hi , I want to do a flip on a house can I use fha to close ? If I decide to keep it can I refinance it in 6 month ? What would be the requirement on refinancing to remove the pmi ? Thank you

My understanding is that FHA loans are for owner residents. So you could probably use it for a live in flip. But the origination fees might be a little high. I'd think that a bank loan would be a cheaper way to go for a flip.

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Welcome to another episode of MATH TIME YOU OLYMPIANS! with Chris.

@Charles Huang ,

Bad idea to do this over and over again, even if you are going to honestly live in the place while fixing it up for the flip. 

FHA UFMIP aka funding fee. 1.75% of loan amount. Each and every flip.

Normally people finance this 1.75% FHA fee, and I do not equate the fee to discount points because you take the hit when you go to sell & random market fluctuations between now and then 5-20 years from now are going to matter way more than 1.75%.

But buying a property with the intention to sell it in a few months is very different. 

Pay the 1.75% out of pocket or finance it, either way you're paying 1.75 points for each flip. 

If the property and your owner occupancy is good enough for FHA, it's good enough for Fannie Mae 5% down.

"But oh no Chris, that 5% down is 1.5% more than 3.5%! Oh em geez!"

Yeah, but that's 1.5% that you get back when you go to sell it because it's 1.5% more towards equity, not towards loan fees. You don't get an FHA funding fee back. It's just gone.

In general you should avoid any fee that is a % of loan amount when it's a property (or financing) that you will only be in for a short period of time. Go the other direction. Jack the rate up, take a lender credit. These are calculated on the assumption that the lender will collect from you at that higher rate for 7-9 years. So when you sell and pay it off in 6-9 months, you win and you beat the bank. 

For example, let's say you do Fannie Mae 5% down with a jacked up interest rate, and I put $8,000 in your pocket today by covering a bunch of the closing costs, for $100/month more in interest. And then you refinance (or sell), with $3500 in closing costs (or a seller credit to the buyer because this high interest rate motivates you to unload it quickly), 6 months later. $100 * 6 = $600. $3500 + $600 = $4100. $4,100 is less than $8,000. Boom, you win.

TLDR: The math never lines up to use FHA for a flip because you will pay that 1.75% no matter what in a flip scenario. Might as well identify some superfluous construction thing like a unicorn statue that will add $0 in home value but costs ~1.75% of (96.5% of the) purchase price, and go build that. Mathematically, by the time you are done flipping this house and counting your money, you will discover that using FHA is no different than building that unicorn statue and paying cash out of pocket for it.

Also, double check on the "seasoning of title" I know at one point in time around my area we could not sell our flips to FHA owner occupants if we had not held the house for 90 days. Even though we put improvements in it that justified the new asking price.

Originally posted by @Chris Mason :

Welcome to another episode of MATH TIME YOU OLYMPIANS! with Chris.

@Charles Huang,

Bad idea to do this over and over again, even if you are going to honestly live in the place while fixing it up for the flip. 

FHA UFMIP aka funding fee. 1.75% of loan amount. Each and every flip.

Normally people finance this 1.75% FHA fee, and I do not equate the fee to discount points because you take the hit when you go to sell & random market fluctuations between now and then 5-20 years from now are going to matter way more than 1.75%.

But buying a property with the intention to sell it in a few months is very different. 

Pay the 1.75% out of pocket or finance it, either way you're paying 1.75 points for each flip. 

If the property and your owner occupancy is good enough for FHA, it's good enough for Fannie Mae 5% down.

"But oh no Chris, that 5% down is 1.5% more than 3.5%! Oh em geez!"

Yeah, but that's 1.5% that you get back when you go to sell it because it's 1.5% more towards equity, not towards loan fees. You don't get an FHA funding fee back. It's just gone.

In general you should avoid any fee that is a % of loan amount when it's a property (or financing) that you will only be in for a short period of time. Go the other direction. Jack the rate up, take a lender credit. These are calculated on the assumption that the lender will collect from you at that higher rate for 7-9 years. So when you sell and pay it off in 6-9 months, you win and you beat the bank. 

For example, let's say you do Fannie Mae 5% down with a jacked up interest rate, and I put $8,000 in your pocket today by covering a bunch of the closing costs, for $100/month more in interest. And then you refinance (or sell), with $3500 in closing costs (or a seller credit to the buyer because this high interest rate motivates you to unload it quickly), 6 months later. $100 * 6 = $600. $3500 + $600 = $4100. $4,100 is less than $8,000. Boom, you win.

TLDR: The math never lines up to use FHA for a flip because you will pay that 1.75% no matter what in a flip scenario. Might as well identify some superfluous construction thing like a unicorn statue that will add $0 in home value but costs ~1.75% of (96.5% of the) purchase price, and go build that. Mathematically, by the time you are done flipping this house and counting your money, you will discover that using FHA is no different than building that unicorn statue and paying cash out of pocket for it.

Thanks for the clear explanation, i did not realize there was a 1.75% origination fee on the FHA loan, thus the better way of using FHA is multi family units and i live in one of them right? thanks