HUD, FHA Loans and Title seasoning

With HUD properties, title seasoning, FHA loans, and short sales, investors have had some confusion regarding the rules.  This article will help clarify all of these issues for you.

HUD is the United States Department of Housing and Urban Development, a government agency whose goal is to increase homeownership, support community development.  The Federal Housing Administration (FHA), which is part of HUD, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States.

HUD and FHA come into play in three different scenarios in the investor/foreclosure arena.

HUD Foreclosed Properties

When a person gets an FHA loan, it is funded through a private lender and the loan is insured or backed by the Federal Housing Administration.  When the loan is in default, FHA pays out the lender and take an assignment of the loan.  When the property is foreclosed, it is owned by HUD.  HUD then offers these properties for sale to both owner-occupants and investors.  The properties are offered on the local MLS computer database, but you have to submit an offer through a HUD-approved real estate broker.  The offer is made under a bid process, under which the HUD will either accept or reject your offer depending on what other offers are submitted.  An investor can buy, hold, or flip these properties if their offer is accepted.

FHA Loans and Title Seasoning

Then second place HUD comes into play is the FHA loan.  If a buyer of your property gets an FHA loan, there is a title seasoning requirement of 90 days.  In other words, if you are selling the property to an FHA buyer, you must have title recorded in your name for 90 days before the closing and funding of the FHA loan.  This precludes you from doing a double-closing or a short-term (less than 90 days) flip.

Keep in mind that the 90-day seasoning rule has nothing to do with HUD-owned properties as described above. In other words, you can buy a HUD property and flip it 3 minutes later so long as your end-buyer is not using FHA financing.

FHA Loans in Short Sale

The third-place HUD comes into play is if you are working on a foreclosure short sale on a property that has an FHA loan.  In this case, the Federal Housing Administration is insuring the loan and must approve the short sale.  You can buy a property with an FHA loan on it, then flip it without a title seasoning issue, unless your end-buyer is getting a new FHA loan.

In summary, don’t confuse the FHA new loan 90-day title seasoning requirement with the two other scenarios, HUD-owned properties, and existing FHA-insured properties.  In addition, having a trusted advisor or mentor that understands these types of loans can really be an advantage! For more information on HUD properties and FHA loans, visit www.hud.gov.