November 10, 2014 – The Federal Housing Administration (FHA) recently announced the end of “prepayment penalties” on FHA-insured loans, as well as notice requirements for interest rate changes on Adjustable Rate Mortgages (ARM) insured by the FHA.
What does this mean for lenders and borrowers? The announcement is summarized below:
- For loans closing on or after Jan. 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 charge to the borrower for the prepayment. Additionally, lenders can no longer require a 30-day advance notice of prepayment by the borrower and must calculate prepayment interest solely on the unpaid principal balance as of the date the borrower prepays the loan.
- For loans closing before 21, 2015, lenders are required to notify borrowers of the privilege “to prepay the mortgage in whole or in part at any time and in any amount” without being charged to do so.
- Effective for FHA-insured Adjustable Rate Mortgages (ARMs) that close on or after Jan. 10, 2015, lenders must notify borrowers of impending monthly payment adjustments and there’s a firm window: no later than 60 days before the scheduled change in monthly payments, but no earlier than 120 days before the scheduled monthly payment adjustments. In addition, monthly payments must be adjusted based on the corresponding index value at the earliest 45 days prior to the scheduled change—the look-back period.
- FHA currently requires a 30-day look-back period for monthly payment adjustments and a 25 day-advance notice to the consumer for the change in monthly payments.
This extended notification and look-back requirement will hopefully provide greater protections for the consumer who will have additional time to respond to monthly payment adjustments on ARM loans.