FHA Eliminates Post-Payment Interest Chargers

Borrowers will be required to pay interest charges only through the date the mortgage is paid.

A new rule that recently went into effect lets lenders charge Federal Housing Administration (FHA) borrowers interest only through the date the loan is paid off and prohibits the charging of interest beyond that date.

For all FHA-insured mortgages with a closing date on or after January 21, 2015, borrowers will no longer be required to pay interest charges for the entire month in which the FHA loan is to be paid off.

Loans that closed before January 21, 2015, will still fall under the old rules and will be charged interest for the entire month.

What effect might this have in the housing market?

Let’s say a seller has an existing FHA loan with a balance of $400,000 at a 5% interest rate and the transaction was scheduled to close on the last day of March. And, for example, due to delays with the buyer obtaining financing, the loan closed on April 2 and the payoff did not get to the selling lender until April 3. In this scenario — under the old rules — the seller would be charged interest as if they did not pay off the loan until the end of April.

Given this scenario, the cost to the seller — as a result of the delay — is $54.79 per day in interest charges totaling $1,479.00 over a 30-day period.

Another result of this change is an increase in the flexibility for all parties involved. “With regard to FHA loans, there’s less pressure on the buyer and the seller to have everything wrapped up by the end of the month,” said Robin Williams, SPFC Vice President of Operations. “If you’re a day or two late, the consequences are not as costly.”

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