Help interpreting FHA "occupancy" clause??

Question

Good morning!

I am in the middle of an FHA owner-occupied live in flip. I was talking with my lender and he pointed out the following wording on my loan:

"This offer is being submitted that I/we will occupy the property as my/our primary residence for at least 12 months"

My thought was the statement above applied toward having an intention to not rent the property out, but now I'm wondering if it applies to my intention to sell as well.

I was considering selling after 6 months (as an owner occupied property there are no capital gains taxes, so it doesn't matter from a tax perspective when I sell)

Has anyone else come across this? Would I be penalized for selling early?

Thank you in advance!!

Christopher Phillips · Answer

@Rachel Luoto

that also implies your intention not to sell. FHA loans aren't meant for investors. If they think you are planning to fix it up and sell within 3-6 months they aren't going to approve the loan.

Also, the capital gains exemption assumes you live in the property 2 years or more out of the recent previous 5 years. So, if you buy and sell within 6 months you'll have to pay short term capital gains, which is based on your tax bracket.

Rachel Luoto · Answer

@Christopher Phillips thank you for the input! Luckily I've got a few exit strategies so not matter what I'll come out ahead, just selling quickly would be my preference.

Rachel Luoto · Answer

@Andrew Postell thank you for the clarification! It was actually the recommendation of my loan officer to keep churning these flips as FHA, before we looked at the occupancy clause, so I hope that means no penalty to him.

That said, I've unexpectedly been approached by a cash partner, so I don't think I'll need to do another FHA in the future :)

Andrew Postell · Answer

@Rachel Luoto Yeah, you loan does have that wording.  A FHA loan is not intended for investors so if you were to get another FHA loan within that first 12 months then it would come into play.  If you are selling the property and getting a different loan type there's not a lot that they can do about that. And really if you show that your family grew or your job transfered you, then you could still get another FHA loan within that period so there are exceptions but there is absolutely NO penalty to you.  Full disclosure here, some banks do penalize the Loan Officer if the loan is paid off within the first 6 months to 12 months....so maybe he get's penalized!  Feel free to ask more questions here if you need. Thanks!