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FHA Loans, Prepayments and Due-On-Sale Clauses

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When shopping for a home, some borrowers come into the house hunt with a strategy that includes paying or pre-paying a chunk of the mortgage loan up front. This isn’ necessarily a down payment per se, but it is something to consider when setting a budget for a home loan and the anticipated mortgage loan payments. Does the FHA allow such a strategy? Can borrowers pay down the loan principal?

FHA home loans do feature the ability to pre-pay a portion of the loan. This can be helpful for many reasons including lowering mortgage payments and saving money over the lifetime of the loan by reducing the principal and the amount of interest paid on that principal.

According to HUD 4155.2 Chapter Three, Section A, “A borrower may prepay a mortgage in whole or in part.” But there are some guidelines the borrower should know about prepayments.

According to the same chapter, if an FHA mortgage was insured prior to August 2, 1985, “the borrower must provide 30 days written notice of prepayment to the lender or be charged one extra month’s interest, and the payment must reach the lender by the first of the month”.

That’s an important aspect of the rules to be aware of, as is this rule for FHA loans insured on or after August 2, 1985. It says, “advance notice of prepayment is not required, and if the payment is received after the first day of the month, the lender may,at its option, collect the remainder of that month’s interest.”

FHA guaranteed mortgages may not feature prepayment penalties or due-on-sale clauses according to HUD 4155.2 Chapter Three, except for cases in which FHA approves a due-on-sale clause in connection with tax-exempt bond financing by state or local governments, or the implementation of statutory restrictions on assumptions.”

That raises another question–are FHA loans assumable? According to Chapter Three, yes. However, FHA loan assumption is not necessarily automatic. Here’s what chapter three says:

“If the loan application was signed by the borrower before December 1, 1986, the FHA-insured mortgage generally contains no restrictions on assumability. For a mortgage where the application was signed on or after December 1, 1986, the loan may be assumable depending on a creditworthiness review of the assumptor(s).”

Do you have questions about FHA mortgages? Ask us in the comments section.

 

Joe Wallace - Staff Writer

By Joe Wallace

February 25, 2013

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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