Pre-payment Strategy and Your FHA Loan
April 16, 2013
Some FHA loan applicants come to the application process wanting nothing more than to make their down payment and get into their mortgage. But other borrowers approach their FHA mortgage with a strategy; one that includes paying or pre-paying a some of the mortgage loan up front.
This pre-payment is not always necessarily intended as a down payment, but it is something to consider when setting a budget your home loan. 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, which is helpful for many reasons including lowering the monthly mortgage payments and/or saving money over the lifetime of the loan (accomplished by reducing the principal and the amount of interest paid on that principal).
The FHA loan rules as stated in HUD 4155.2 Chapter Three, Section A, "A borrower may prepay a mortgage in whole or in part." But there's something a borrower should know about that pre-payment--for any FHA mortgage 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".
What about FHA loans insured on or after August 2, 1985? HUD 4155.2 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."
Another area borrower should be aware of--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."
The word "assumptions" in the quote above implies FHA mortgages can be assumed. Is that true? According to Chapter Three, yes. However, an FHA loan assumption is not necessarily automatic. "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)."
For more information on any of these issues, speak to a loan officer or contact the FHA directly.
This pre-payment is not always necessarily intended as a down payment, but it is something to consider when setting a budget your home loan. 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, which is helpful for many reasons including lowering the monthly mortgage payments and/or saving money over the lifetime of the loan (accomplished by reducing the principal and the amount of interest paid on that principal).
The FHA loan rules as stated in HUD 4155.2 Chapter Three, Section A, "A borrower may prepay a mortgage in whole or in part." But there's something a borrower should know about that pre-payment--for any FHA mortgage 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".
What about FHA loans insured on or after August 2, 1985? HUD 4155.2 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."
Another area borrower should be aware of--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."
The word "assumptions" in the quote above implies FHA mortgages can be assumed. Is that true? According to Chapter Three, yes. However, an FHA loan assumption is not necessarily automatic. "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)."
For more information on any of these issues, speak to a loan officer or contact the FHA directly.
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