September 26, 2018
What happens if you pre-pay your FHA mortgage? FHA home loans are known for having no pre-payment penalty but there may be certain steps the borrower is required to take in order for such pre-payments to be used as intended.
The date of your FHA loan may make an important difference in how you are to proceed; it’s best to discuss pre-payment options with your loan officer ahead of time to learn what, if any, additional lender requirements may exist above and beyond the FHA loan standards we’re discussing here.
What follows is NOT lender policy but the FHA loan rules. Lender requirements may add to or further develop these FHA guidelines.
FHA Home Loan Rules For Pre-Payment On Mortgages Closed On Or After January 21, 2015
FHA loan rules instruct the lender to accept a prepayment on FHA mortgages closed on or after January 21, 2015, “at any time and in any amount” according to page 557 of HUD 4000.1. “The Mortgagee must calculate the interest as of the date the prepayment is received, not as of the next Installment Due Date”.
FHA Home Loan Rules For Pre-Payment On Or After August 2, 1985
In cases where the FHA loan has closed on or after August 2, 1985 and before January 21, 2015, the lender is required to accept prepayments if the Borrower prepays the Mortgage in full on the first Day of any month in the term of the Mortgage. What happens if this condition is not followed by the borrower?
In such cases the lender is permitted to refuse to accept the prepayment until the first day of the following month; or accept the prepayment and require the payment of interest to the first Day of the next month.
HUD 4000.1 states, “For Prepayment in Full, this option may only be used if the Mortgagee has provided the Payoff Disclosure to the Borrower”.
FHA Home Loan Rules For Pre-Payment On Mortgages Insured Prior to August 2, 1985
HUD 4000.1 states that a 30-Day Advance Prepayment Notice is required of the FHA borrower “to provide advance notice to the Mortgagee for prepayment of an FHA-insured Mortgage insured prior to August 2, 1985”. In such cases the lender is required to accept prepayments on FHA mortgages when there is a 30 day advance prepayment notice, and prepays the FHA mortgage “in full on the first Day of any month in the term of the Mortgage”.
What about cases where the borrower’s prepayment is offered on a day other than the Installment Due Date? HUD 4000.1 instructs the lender that it is permitted to refuse to accept the prepayment until the first Day of the month (this is following the expiration of the 30-Day Advance Prepayment Notice Period) or the lender may accept the prepayment but “require the payment of interest to the first Day of the month following the expiration of the 30-Day Advance Prepayment Notice Period.”
For situations where the borrower wishes to prepay in full, “this option may only be used if the Mortgagee has provided the Payoff Disclosure to the Borrower”.
Ask your loan officer for more information on individual lender requirements in addition to these rules.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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