Over the last few years, house flipping has become popular across the U.S. According to home flipping statistics, 7.5 percent of home sales in 2020 were flips.
Home flipping is not illegal in Indiana, but safeguards have been put into place by the federal government through the Federal Housing Administration (FHA), a department of Housing and Urban Development (HUD), and the Indiana Home Loan Practices Act. Indiana law also requires homeowners to disclose what they know about a home's condition.
FHA Rules for Short-term House Flippers
According to HUD Handbook 4000.1, flipping is "the purchase and subsequent resale of a property in a short period of time." When a real estate investor flips a house, they may remodel the home to increase its value. The FHA has a 90-day flip rule that states FHA lenders must hire FHA appraisers to research a home's ownership history.
If the most recent recorded ownership deed is fewer than 90 days away from the new date of sale, the lender will refuse the loan. Further investigation is necessary if the seller purchased a house within the last 91 to 180 days. If the lender finds that either of the following applies, it requires a second appraisal:
- The home's resale is between 91 to 180 days, and the new sale price is 100 percent or higher over what the seller paid for it.
- A higher-priced loan (HPML) and the sale price are 20 percent or greater than the seller's purchase price.
Second Appraisal Process
The FHA also has rules on the second appraisal process:
- Different appraiser must carry out the second appraisal.
- Purchaser cannot pay for the second appraisal.
- Second appraisal must include documentation to support the home's increased market value.
- If the second appraisal is 5 percent lower than the first, the lower value is used.
- Lender must receive a 12-month chain of title documenting the home's resales.
Indiana Home Loan Practices Act
The Indiana Home Loan Practices Act became effective for loans made from 2005 onward. It imposes restrictions on high-cost home loans and the brokers or lenders that originated them. It also addresses specific practices that arise during loan servicing and imposes violations on the creditor, as well as on purchasers and assignees. Entities who violate the Act face statutory damages that double the finance charges agreed to in the mortgage loan documents.
A high-cost home loan is a loan with a trigger rate that exceeds the benchmark interest rate, or total points and fees that exceed 5 percent of the loan principal for a loan with a loan principal of a minimum of $40,000 and 6 percent of the loan principal for a loan with a loan principal of less than $40,000.
High-cost Home Loan Restrictions
The Indiana Home Loan Practices Act prohibits unfair practices, including the unpredictable acceleration of payments, encouraging default and special or subsidized loan refinancing. Other restrictions on high-cost home loans include:
- Creditor must not make a high-cost home loan without regard for an entity's repayment ability.
- Creditors cannot intentionally refinance a high-cost loan by charging points and fees on that part of a loan used to refinance the existing home loan within four years of the origination of the current loan.
- Creditors cannot intentionally consolidate or replace a zero interest or subsidized loan made by a government entity or nonprofit with a high-cost loan in the first 10 years of that loan unless the current loan holder consents to the refinancing in writing.
- Creditors who make a high-cost home loan cannot finance any points and fees directly or indirectly.
- Creditors cannot include penalties or prepayment fees in loan documents for a high- loan or charge them to a borrower if they exceed 2 percent of the high-cost home loan paid within the first 24 months after the loan closing.
- Creditors cannot sell or assign a loan without providing notice to the purchaser or assignee, in language per the Act and conditional to special rules. Assignees and purchasers can face liability for claims that a borrow asserts against a lender.
- Loans cannot require a scheduled payment more than two times larger than the average monthly payments scheduled previously under the high-cost home loan agreement unless the charge becomes due 120 months after the loan date.
- Creditors cannot divide loan transactions into multiple arrangements to evade the Act.
Real Estate Disclosure Laws in Indiana
Indiana requires the seller of a home to complete a real estate disclosure form that discloses the facts and condition of the property before closing on a property. A Residential Real Estate Sales Disclosure form is available through the State Forms Center and through Indiana real estate agents and attorneys.
Information Included in a Disclosure Form
Sellers must tell potential buyers about known defects in a home's structure, its major systems and appliances (if included in a sale). However, the law does not cover anything that the seller does not know about. The disclosure form contains several questions for the seller to answer, including:
- Is the home's zoning residential?
- Do the structure and fencing encroach on other property?
- Are there cracks in the foundation?
- Are there insect or rodent problems?
Indiana law also requires sellers to inform home buyers if the house is within one mile from an airport and or if anyone has used it as a methamphetamine lab. If someone used a home to produce methamphetamine, a certified decontamination specialist should clean it before anyone lives in it.
- HUD: Handbook 40001
- Casetext: Ind. Code Section 24-9-2-8
- Casetext: Chapter 4 - Additional Prohibitions for High Cost Home Loans
- Indiana.gov: State Forms Online Catalog
- NOLO: Selling an Indiana Home: What Are My Disclosure Obligations?
- Attom Data: Home Flipping Rate and Gross Profits Decline Across U.S. in First Quarter of 2021
- Justia: 2017 Indiana Code TITLE 32. Property ARTICLE 21. CONVEYANCE PROCEDURES FOR REAL PROPERTY CHAPTER 5. Residential Real Estate Sales Disclosure 32-21-5-7. Disclosure form; contents
- Find Law: Indiana Code Title 24. Trade Regulation § 24-9-5-4
Michelle Nati is an associate editor and writer who has reported on legal, criminal and government news for PasadenaNow.com and Complex Media. She holds a B.A. in Communications and English from Niagara University.