Does an FHA Loan Have a Prepayment Penalty?

Federal Housing Administration (FHA) loans are mortgages insured by the federal government and are popular among first-time home buyers. This is because these loans allow down payments as low as 3.5 percent for borrowers with credit scores of 580 or above.

Borrowers with FHA loans must pay mortgage insurance premiums, designed to protect the lender if the mortgage goes into default. And buyers with lower credit scores may have to make bigger down payments or pay higher interest rates.

Can I Get Hit with a Prepayment Penalty if I Pay Off My FHA Loan Early?

Recent FHA loans do not put homeowners at risk for a prepayment penalty if they pay, refinance, or sell their mortgages. This is because FHA loan rules are not supposed to carry any due-on-sale clauses or early payment penalties.

Borrowers used to be charged prepayment penalty costs in the form of post-payment interest for settling their mortgages early, according to an FHA blog. It’s estimated that in 2012, FHA loan holders paid $449 million in post-payment interest fees.

To help remedy this, the FHA revised its rules in January 2015, requiring lenders of these loans to calculate interest for the final payment by using the actual unpaid mortgage balance as of the date of the prepayment received. This means that FHA loans can only charge interest through the date of the final payment, not through the end of the pay period in which the final payment was made.

Prior to that change in the rules, a lender could hold a borrower responsible for the full interest up to their next installment due date. This means that even if the homeowner paid the full balance on the mortgage, they would still be responsible for the interest until the payment is due.

While this post-payment interest charge is not meant to be a prepayment penalty, Investopedia.com says that many homeowners feel as though it is.

What is Post-Payment Interest?

Post-payment interest is interest applied to the period between the date of the final payoff and the next payment due date. For example, if a loan due date is the 5th of the month and if the entire loan is paid off by the 1st of the month, the lender might still charge post-payment interest on the remaining 10 days.

While not technically a prepayment penalty, according to HUD, FHA loans that were signed after Jan. 21, 2015, are not subject to these charges. Homeowners often choose to pay off mortgages to lessen their financial burden, but should check with their bank or financial servicer to review the rules for their particular loan.

Homeowners with an FHA loan are still subject to other monthly payments including principal, interest, real estate taxes, and mortgage insurance premiums.

How Do I Prepay My FHA Loan?

There are various ways to pay off FHA loans sooner than originally planned. Some ways homeowners can pay their loan include:

• Paying an extra $100 per month
• Making an annual lump sum payment
• Paying extra when financially able
• Paying an extra 1/12th of the mortgage payment each month

Are there any disadvantages of an FHA Loan?

All home loans vary in benefits and drawbacks, and customers should be aware of these facts with FHA loans. Some disadvantages of FHA loans include but are not limited to:

• Higher interest rates compared to conventional mortgage loans
• Two types of mortgage insurance premiums
• FHA is very strict about condos that qualify for these home loans
• Multiple offers on a house can make things complicated

According to homebuyinginstitute.com, if a consumer puts a 10 percent down payment on a house an FHA home loan could be a good option.

Join a Regions Bank FHA Mortgage Class Action Lawsuit Investigation

If you had an FHA mortgage loan with Regions Bank, and you sold, refinanced or paid off your mortgage early, you may have been charged a post-payment interest fee. If so, you may be owed money.

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This article is not legal advice. It is presented
for informational purposes only.