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GOOD NEWS for Home Sellers with FHA Financing! Attn: Listing Agents.

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

GOOD NEWS for Home Sellers with FHA Financing! 

Attn:  Listing Agents.

How often have you gotten to the settlement table and saw the HUD-1 and realized that your seller was going to be short of money.  This is a mistake made by many new agents or agents who rarely sell a home to a buyer with FHA financing. 

For many, many years, when representing home buyers, we schedule closing toward the end of the month to reduce the pre-paid interest.  This practice also benefited the home seller, whether they realized it or not.  NO, we didn't settle on the last day of the month because even with overnight mail of the pay-off the lender wouldn't receive the pay-off until the 1st or 2nd of the month, meaning the seller would be charged for the entire month. 

LINE 603, Seller's side is a negative amount.  The first thing sellers with little equity will notice is that there are insufficient net proceeds to pay off the mortgage loan.  The number on line 603 is the amount the seller needs to close.  It's rough when a home seller has to bring money to the table

Of course, what's even rougher is when the agent is not sufficiently trained in FHA financing to realize that FHA and FHA only collects interest for what's remaining of that month. 

NO PRO-RATING OF THE PAY-OFF with an FHA loan.  Settle on the 3rd of the month and the seller is charged for the entire month of interest, even when they no longer own the property.  Settle on the 1st day of the month and a full month interest is charged to the seller.  Settle on the 15th of the month and 15 or 16 days of interest is charged to the seller. 

THIS PRACTICE OF GOUGING THE SELLER IS ONLY WHEN THE HOME THEY ARE SELLING IS FINANCED WITH AN FHA LOAN.

VA Financing pro-rates the pay-off.
Conventional Financing, Fannie and Freddie, pro-rate the pay-off.

ENTER the CFPB.  They have mandated, pursuant to Dodd-Frank, that FHA change their practice and cease charging for the entire month irrespective of the date of settlement.  The change ordered won't take effect until January 21, 2015.  A lot of loans will close and a lot of sellers will be gouged by FHA before that date. 

LISTING AGENTS ALERT!!  Until January 1, 2015, make sure your seller understands that, unless the sale of his home is at the end of a month, he will pay a lot of extra interest to the lender or servicer.  If for some reason the buyer wants to settle early in the month, then that may affect the final price of the home.  After all, a month of mortgage interest is a lot of money. 
That home seller will think you're a genius.  You are!
 
                                           

                             

 

   Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, serving home buyers in Loudoun County, VA.

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Comments(50)

Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Lenn, excellent information especially in our area where there are quite a few FHA loans. Why are they waiting so long to implement the change?

Mar 31, 2014 10:07 PM
Kat Palmiotti
eXp Commercial, Referral Divison - Kalispell, MT
Helping your Montana dreams take root

Thankfully, this is finally changing -- not prorating the interest simply doesn't make sense.

Mar 31, 2014 10:20 PM
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Real Estate Agents - Luxury - Divorce

Wonderful  information that needs sharing everywhere !

Mar 31, 2014 10:24 PM
Paul McFadden
Responsive Pest Control - Seattle, WA
Pest Control, Seattle, WA.

Lenn: Good update. This is potentially good news. Thanks again for the post!

Mar 31, 2014 11:05 PM
John Jonas
ReplaceMyself - Virtual Assistants - Highland, UT
John Jonas

A helpful piece of information worth posting. Thanks for this!

Mar 31, 2014 11:12 PM
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

Intelligent, in the business relevant posting...Worthy of front page

Mar 31, 2014 11:32 PM
Raul Rodriguez
Covenant Partners Realty - San Antonio, TX
Looking out for the client's interest and not my p

Thank you for sharing valuable information.

Mar 31, 2014 11:39 PM
Ritu Desai 703-625-4949
Samson Properties - Chantilly, VA
Northern Virginia,Washington DC & Maryland Realtor

Also Lenn, you need to have enough buffer days so that the payoff hits the banks prior to the end of the month. If it funds hit the bank after the 1st of the month they will be charged with entire month interest. Excellent blog.

Mar 31, 2014 11:49 PM
Juli Vosmik
Dominion Fine Properties - Scottsdale, AZ
Scottsdale/Cave Creek, AZ real estate 480-710-0739

Lenn, you mean the government is actually doing something positive on the home front- prorating interest?  What a concept, LOL.  Seriously, this really is good news and a positive step from the Feds.  

Mar 31, 2014 11:59 PM
Pam Graham
All Real Estate Options - Jacksonville, FL
Jacksonville, Clay & St Johns Counties

That's awesome advice Lenn and like Juli above, I was surprised that the government was making those changes in Jan 2015. Good to know!

Apr 01, 2014 12:02 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Juli.  It comes from the CFPB which is a strange animal.  It actually appears to work in the consumer's interest.

Ritu.  That's a fact which is why I usually make sure that settlement is no less than 2 days prior to EOM.  Also that the closing agent knows to get the dang think in Express Mail in time.

Raul.  My pleasure.

Richie.  You do wonders for my ego.

John.  Glad to help.

Paul.  Plenty of time for things to go wrong.  I'll try to follow it.

Sally and David.  Folks have to keep up.

Kat.  Never did, but it gave FHA many millions extra.

Michael.  It's not disclosed but I suspect that it hasn't gone through the Federal Register announcement and comment period.

Brian.  Indeed.  That Dodd-Frank is quite unpredictable, good and bad news.

Apr 01, 2014 12:08 AM
Donna Harris
Donna Homes, powered by JPAR - TexasRealEstateMediationServices.com - Austin, TX
Realtor,Mediator,Ombudsman,Property Tax Arbitrator

THat's very interesting that they're going to change that. I hate closing at the end of the month because everyone else is closing and it's harder to get appts at the time you want them.

Apr 01, 2014 12:17 AM
Michael Layton
RE/MAX Desert Properties - Palm Springs, CA
Experience and Trust

Thanks for the reminder. I knew that but I did not know it was going away! So thanks for the new information too.

Michael

Apr 01, 2014 12:26 AM
Bill Reddington
Re/max By The Sea - Destin, FL
Destin Florida Real Estate

Haven't done an FHA loan in years. Too many other programs out there to deal with the nonsense. Lots of VA's

Apr 01, 2014 01:10 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Bill.  Of course, if given the choice, VA is much better, but not everyone has the benefit.  FHA is very popular here especially with the high loan limits today.

Michael.  Cross your fingers.  It's hasn't happened yet.

Donna.  Indeed.  I've run into that too. 

Apr 01, 2014 01:26 AM
Kate McQueen
Realty Associates Texas - Cypress, TX
Tailored service for your real estate needs!

This is GOOD news!  Thanks for sharing!

Apr 01, 2014 02:08 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Kate.  My pleasure.  Thanks for stopping by.

Apr 01, 2014 04:18 AM
Jerry Newman
Brown Realty, 210-789-4216, - San Antonio, TX
Texas REALTOR, San Antonio Military Relocation

Lenn, I have worked more with FHA buyers, and we always aimed at end of the month closings, but I wasn't aware the the Sellers were the losers with all that charged interest when they buyers closed at other times in the month.

Apr 01, 2014 06:49 AM
Jeff Jensen
The Federal Savings Bank/Lending in 50 states - Greenwich, CT

With so many buyers being strapped for funds most folks prefer late month closings.

Apr 01, 2014 08:00 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Jerry.  FHA doesn't pro-rate the proceeds the way conv. or VA does.

Jeff.  Sure, and that's fine, but many sellers don't understand that they'll be paying interest till the end of the month no matter when they close.

Apr 01, 2014 08:20 AM