FHA Mortgages

Capital Metropolis House Loans Screens Modifications to FHA Loans and ARMs

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November 10, 2014 – The Federal Housing Administration (FHA) recently announced the end of “prepayment penalties” on FHA-insured loans and the termination requirements for interest rate changes on FHA-insured adjustable rate mortgages (ARM).

What does this mean for lenders and borrowers? The announcement is summarized below:

  1. For loans closed on or after January 21, 2015, lenders are prohibited from collecting back payment interest on any single-family mortgage product insured by the FHA. Lenders must accept prepayment from a borrower “at any time and in any amount” without the borrower charging the prepayment. In addition, lenders can no longer require 30 days’ advance notice of prepayment by the borrower and must calculate prepayment interest solely on the principal amount unpaid from the date the borrower prepays the loan.
  1. For loans taken out before 21st 2015, lenders must inform borrowers of the privilege of “prepaying the mortgage in full or in part at any time and in any amount” without being charged.
  1. Starting with FHA-insured adjustable rate mortgages (ARMs) that close on or after January 10, 2015, lenders must notify borrowers of upcoming monthly payment adjustments and there is a fixed window: no later than 60 days prior to the scheduled change in the monthly payments. but not earlier than 120 days before the planned monthly payment adjustments. In addition, the monthly payments must be adjusted no earlier than 45 days before the planned change – the look back period – based on the corresponding index value.
  1. FHA currently requires a 30-day review period for monthly payment adjustments and a 25-day advance notice to the consumer for the monthly payment change.

This expanded notification and review requirement will hopefully provide better protection for the consumer who has additional time to respond to monthly payment adjustments for ARM loans.

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Linda Garcia

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