Investors in foreclosures and REOs: Get ready to rev up your business volume.

That's because starting February first, HUD is waiving its controversial 90-day anti-flipping rule for FHA financing.

Investors who buy and fix up foreclosed and bank-owned properties now will have a reliable go-to source of low-downpayment financing for retail buyers sooner than 90 days.

Under HUD's previous policy, FHA financing was prohibited on purchases where the seller had acquired the property less than 90 days before.

The idea was to cut back on rampant reselling of houses in short time periods, often with fraudulent appraisals to back spiraling prices -- and exposing FHA to heightened risk of losses.

Last week FHA commissioner David Stevens sent out an advisory to lenders that the agency plans to waive this policy, with certain key restrictions, for one year, until February of 2011.

The reason, he said, is that foreclosures are now an economic burden in many markets, and that greater availability of FHA mortgage insurance could help move vacant houses into the hands of investors who'll repair and improve them, and then sell to first-time buyers and others.

HUD recognizes that "acquiring, rehabilitating and then reselling" foreclosed is often possible in far less than 90 days, said Stevens.

"Prohibiting the use of FHA mortgage insurance for a subsequent sale within 90 days of acquisition" by an investor "adversely impacts the willingness of (investors) to bid on these properties" -- given the high costs of holding them and the risks of vandalism, Stevens added.

What sorts of restrictions come with the new policy that investors need to know about?

Number one: All transactions must be "arms length" with no identity of interest among buyers, sellers or others.

Number two: When the selling price is 20 percent or more above what the seller paid, lenders will need to document the renovation and improvement expenditures by the seller to justify the price - usually with the help a second appraisal to confirm the valuation.

Lenders will also need to order an independent property inspection and provide the report to the purchaser before closing.

Steve White, co-owner and principal of Keller Williams VIP Properties in Valencia, California, told Real Estate-Realtor Times that the FHA policy change "is going to be a godsend" for investors and home buyers across the country.

"The demand (for this type of housing) is incredible in our market," said White, who is the California Association of Realtors' 2010 vice chairman for legislation.

"We need inventory" to handle this demand, and "FHA's new policy will help a lot."

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