FHA Eliminates the Prepayment Payment Penalty and Makes Changes to the ARMS

Written By: Glenn Michaels, Op-Ed Writer

Every now and then I go over the various issues of the Federal Register to see if HUD/FHA are proposing or have issued final rule changes.

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Two changes were in the Federal Register. If you are originating or servicing FHA mortgage loans you should be aware of these changes.

The FHA eliminated the “post payment” of interest a/k/a “prepayment penalty” on FHA insured mortgage loans and made changes to FHA insured Adjustable Rate Mortgages.

Effective with FHA loans that close on or after January 21, 2015 lenders will be prohibited from collecting post payment interest on all FHA insured Single Family mortgage products. Lenders will be required to accept a borrower’s prepayment at any time and in any amount without a charge to the borrower for prepaying the mortgage.

Currently, FHA’s monthly interest accrual amortization method lenders are to collect interest to the end of the month in which the mortgage is prepaid. The new requirements also include provisions that impact FHA loans that close before January 22, 2015. For example\, lenders are required to notify borrowers of the privilege “to prepay the mortgage in whole or in part and in any amount” without being charged to do so.

Effective for FHA insured Adjustable Rate Mortgages (ARMs) that close January 10, 2015 lenders must notify borrowers of impending payment adjustments no later than sixty (60) days before the scheduled change in monthly payments, but no earlier than one hundred twenty (120) days before the scheduled adjustments. In addition, monthly payments must be adjusted based on the corresponding index value at the earliest forty five (45) days the scheduled changes, the look back period.

FHA currently requires a thirty (30) day look back period for monthly payment adjustments and a twenty five (25) advance notice to the consumer regarding the change in monthly payments. The additional time is expected to provide greater protections to the consumer who will have additional time to respond to impending monthly payment adjustments on ARM terms.

The first rule change will save borrowers some money if they pay off a FHA mortgage early.

The second rule change does not save a borrower any money. It could give a borrower a little more time to do a FHA Streamline refinance if the new payment adjustment is too high for the borrower.

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These two (2) changes go into effect in January 2015 and everyone needs to get ready for the changes.


About The Author

Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 

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