To encourage the resale of foreclosed properties, the Department of Housing and Urban Development (HUD) is temporarily easing a restriction on the type of properties that can be bought with an FHA mortgage.

The waiver will lift a rule that generally prohibits FHA-insured mortgages from being used to purchase a home that the seller had owned for less than 90 days. The intent of the waiver is to give FHA borrowers access to a wider selection of recently foreclosed properties.

The temporary rule change will enable FHA borrowers to purchase foreclosed properties that had recently been acquired from their previous owners by the bank, HUD or private investors without having to wait three months. The waiver takes effect Feb. 1, 2010 and lasts for one year.

"As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers," said HUD Secretary Shaun Donovan. "FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization."

The temporary rule change is intended to allow foreclosed properties to be resold more quickly, thereby helping stabilize real estate values and communities.

Allows wider choice for FHA borrowers

Foreclosed properties are frequently purchased at auction by investors with the intent of rehabilitating and reselling them. The FHA determined that, in the current market, this frequently takes less than 90 days and that barring FHA buyers from purchasing such homes during that time excluding a significant portion of the potential market.

"FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," said FHA Commissioner David H. Stevens. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

Certain limitations will apply to prevent predatory "flipping" of homes, or the quick resale at greatly inflated prices. These include a requirement that all transactions be "arms-length," with no shared financial interest between buyers and sellers and transactions in which the sales prices exceeds the seller's acquisition cost by 20 percent will be subject to additional scrutiny.

Published on November 3, 2008