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Did you know that under the FHA loan program you cannot be penalized for prepayment and/or early payoff of the loan? Paying more than you owe each month or making multiple payments shouldn’t cost you more. Neither should the act of paying your loan off ahead of schedule.

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FHA.com is a privately owned website, is not a government agency, and does not make loans.

Prepaying an FHA Mortgage

April 26, 2022

Prepaying an FHA Mortgage
What makes an FHA mortgage different from a conventional mortgage? FHA loans have more forgiving credit requirements, and you may qualify (with FICO scores) for a lower down payment than some conventional loans. 

One big difference between conventional mortgages and FHA loans involves prepaying the loan. Did you know that under the FHA loan program you cannot be penalized for prepayment and/or early payoff of the loan? Paying more than you owe each month or making multiple payments shouldn’t cost you more. Neither should the act of paying your loan off ahead of schedule.

Once upon a time, this guidance was found in HUD 4155.2 Chapter Three, which had a section describing what the FHA terms, "prepayment". And while HUD 4155 is now a very obsolete reference, we still find this rule in full effect as written in the replacement volume HUD 4000.1, the FHA Lender’s Handbook for single-family mortgage loans. In fact, it was modified to make the rule a bit more consumer-friendly.

Why do we point this out? Because the early payoff issue is an important one, regardless of whether you want to make extra payments, or if you are interested in refinancing the loan at some point. 

If this consumer issue wasn’t as important in the eyes of the Department of Housing and Urban Development, the rule might not have survived the transition from the old regulations to the new. But it did survive. And FHA borrowers benefit as a result.

HUD 4000.1 says that a borrower may prepay an FHA mortgage "in whole or in part" and there must be no penalty to the borrower. Here is the text of that rule as found in the current version of the FHA Lenders’ Handbook. It applies to most mortgages approved today under the FHA home loan program.

It starts by saying that the lender, “must accept a prepayment on a Mortgage closed on or after January 21, 2015, at any time and in any amount. The Mortgagee must calculate the interest as of the date the prepayment is received, not as of the next Installment Due Date”. Older home loans may have different rules. For example, HUD 4000.1 has the following loan rules for FHA mortgages closed on or after August 2, 1985, and January 21, 2015.

“The Mortgagee must accept a prepayment on a Mortgage insured on or after August 2, 1985, and closed before January 21, 2015, if the Borrower prepays the Mortgage in full on the first day of any month in the term of the Mortgage.”

There is more to these rules. “If prepayment is offered on a day other than the Installment Due Date, the Mortgagee may:
 
  • Refuse to accept the prepayment until the first day of the next month or;
  • Accept the prepayment and require the payment of interest on the first day of the next month.“
HUD 4000.1 adds that when exercising a Prepayment in Full option, it may only be used “if the Mortgagee has provided the Payoff Disclosure to the Borrower.” It’s best to have a conversation with your loan officer about paying early to determine what FHA loan rules may apply to your specific mortgage.

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