FHA Loans - Prepayment Penalty?

By
Services for Real Estate Pros with Burrell Closing Service Inc. FF 167558 Exp. 11/20/2018

I am a Notary Signing Agent and am hired primarily by Title Companies to perform mortgage signings in borrower's homes or whatever location is convenient for them. Many of these are refinance loan signings and occur after regular business hours, but sometimes I am contacted to perform purchase closings and often these will be during office hours to facilitate immediate funding of the loan.


Recently I was closing an FHA purchase money loan in the local office of a nationwide builder. The TIL indicated that the prepayment of the loan 'May" incur a penalty. This caused some concern to the borrower as his understanding was that his loan carried no such penalty. A search through the loan documents yielded no prepayment penalty addendum to the note or prepayment penalty rider to the mortgage. There was the standard two-page FHA "Important Notice to Homebuyers" containing their required disclosures including this:

 

About Prepayment

This notice is to advise you of the requirements that must be

followed to accomplish a prepayment of your mortgage, and to

prevent accrual of any interest after the date of prepayment.

You may prepay any or all of the outstanding indebtedness due

under your mortgage at any time, without penalty. However, to

avoid the accrual of interest on any prepayment, the prepayment

must be received on the installment due date (the first day of the

month) if the lender stated this policy in its response to a request

for a payoff figure.

Otherwise, you may be required to pay interest on the amount

prepaid through the end of the month. The lender can refuse to

accept prepayment on any date other than the installment due

date.

 

This was a first-time buyer and he was being guided through the transaction by his father, who was leery of his son signing a document with such "ambiguous language" (as he termed it). Since the loan was originated by the lending subsidiary of the builder, I made a call requesting an explanation from the loan officer, whose office was in the same building. While waiting for a response we continued through the rest of the closing documents and completed the signing with the exception of the TIL.

 

When the loan officer came into the closing room to address the borrower's concerns, she indicated that the box was checked because of the HUD requirement for prepayment to occur only on the payment due date. After a few minutes spent discussing the reasoning behind this disclosure, the borrower finally agreed to sign the document, his loan was funded, and he received the keys to his first home.

 

This lender was using a very strict interpretation of "Prepayment Penalty" that I had never seen before.

It has been a couple of years since I have seen much volume of FHA loans, so I am putting this question out there for your comments.

 

In this case, was this proper disclosure of a possible prepayment penalty per HUD guidelines?

 

Comments (21)

Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

Scott,

Thanks for your comment.

I realize there are many disclosures required for a FHA loan in comparison with other loan programs.  What I am questioning is the specific disclosure regarding the possibility of a prepayment penalty on a FHA loan.

Teresa

Nov 12, 2007 09:21 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Teresa, that is a standard disclosure on every FHA Loan that I have ever done.  It is a prepayment penalty in the since that you have to pay the accrued interest after the 1st of the month, but it is not a prepayment penalty like on Subprime Loans, where you usually have to pay a penalty that is equal to six months principal and interest   if you pay the loan off in the first two or three years.  So yes it is considered a penalty, but it is small compared to what is normally thought of as a prepayment penalty.

Unlike a Subprime loan this small prepayment penalty can be avoided by paying the loan off on the 1st of the month instead of some other time during the month. With Subprime even if you pay it on day short of the two or three year period they will zap you for the whole six months.

Hope this helps Teresa. 

Nov 13, 2007 07:10 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Teresa, by the way I forgot to congratulate you on posting your first blog, and I am happy to be the second comment on it.  I look forward to seeing you around the Rain.
Nov 13, 2007 07:14 AM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

George, thanks for your comments.  I am grateful for the opportunity ActiveRain gives us all to ask questions and share information.

I agree, the disclosure about the timing of prepayments is included in every FHA loan I have ever seen.  It appears I did not word my question in in quite the way I needed in order to elicit the responses I am looking for. 

What I am really asking is:  Was the disclosure on the TIL correct when stating there "May" be a penalty if the loan is paid off early?

All other HUD loans I have closed have not treated this issue as a prepayment penalty, although the aforementioned disclosure regarding the timing of the prepayment (on the payment due date) was included.  This was very confusing to the buyer at the time.  I am trying to figure out if this is how HUD is requiring the TIL to read or if this is just the way this particular lender chose to interpret the timing of a prepayment.

Another lender made this disclosure on the TIL:

Prepayment: If you pay off this loan early, you    may X will not have to pay a penalty, and you   may X will not be entitled to a refund of part of the finance charge. X If you pay off an FHA insured loan, on a date other than the regular installment date, you may be assessed interest charges until the end of the month.

I think this is a much clearer representation of the features of the loan.

Nov 13, 2007 12:14 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Teresa, OK I think I understand what you are asking now.  I did an FHA Loan yesterday and I just took a look at the TIL and mine also has:

Prepayment: If you pay off this loan early,

      may    X will not have to pay a penalty. 

      may    X will not be entitled to a refund of part of the finance charge.

Checked off but it does not have X If you pay off an FHA insured loan, on a date other than the regular installment date, you may be assessed interest charges until the end of the month. 

On it.  My Borrowers sign a TIL with me when I have them sign the Loan Application (1003) and again with the Attorney at the time of the Closing.

That third statement might just be something that, that Lender adds to their TIL

Nov 13, 2007 01:57 PM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

George,

Thanks for revisiting this with me.  It seems your TIL is in line with what I have seen in the past and does not define the "prepayment date" issue as a prepayment penalty.  Will your final TIL in the final loan package show the same classification?

I believe the lender described in the scenario in my post was using a very narrow interpretation of prepayment penalty, which only served to confuse the borrower.  I don't think they have originated many FHA loans.

The second TIL disclosure in my comment above is from a refinance transaction and was generated by a lender who has originated many FHA loans.  I think the additional disclosure noting the FHA interest assesment is a more accurate depiction of the features of the loan when it comes to prepayment.

Although I knew all FHA loans include this prepayment disclosure regarding the prepayment date, I will now be more aware of how this feature is (or is not) disclosed on the TIL.

Nov 14, 2007 04:27 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Teresa

The TIL at the Closing will be the same, and I think that your assessment of this Lender is correct.

Nov 14, 2007 04:36 AM
Rebecca Fair
Mobile Notary Services - Vero Beach, FL

Hi Teresa,

I'll try to clarify this for you as simply as possible and George is absolutely correct stating that this is not a ppp that you would have with a conventional loan. This ppp applies to Government back products such as FHA & VA loans. Conventional loans accrue interest daily and FHA & VHA loans accrue interest monthly. If you ask me, this is the reason for and what started the whole EOM rush. If you payoff your FHA or VA loan on 11/30/07 you are only responsible to pay the interest to date. If you payoff your FHA or VA loan on 12/1/07 you will be responsible for the entire months interest for December. Unlike conventional loans, FHA & VA do not prorate monthly interest. 

I hope this helps.

Nov 15, 2007 05:42 AM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

Becca,

I am aware of the requirement to pay off an FHA (or VA) loan on the payment due date in order to avoid paying any additional accrued interest.  What was in question was the TIL disclosure of this issue as a possible prepayment penalty by stating there "May" be a prepayment penalty. 

I believe George agreed with my final assesment that this particular lender had a very narrow view of this "prepayment date" requirement and chose to classify it as a possible penalty on the TIL, contrary to how this is disclosed by most (if not all) other lenders.

Thanks for your comment.

Nov 16, 2007 12:40 AM
Rebecca Fair
Mobile Notary Services - Vero Beach, FL

The TIL for the FHA that I closed last night had this disclosure re: ppp.

"PREPAYMENT: IF YOU PREPAY YOUR LOAN OTHER THAN ON THE REGULAR INSTALLMENT DATE YOU MAY BE ASSESSED INTEREST CHARGES UNTIL THE END OF THE MONTH AND YOU MAY BE ENTITLED TO REFUND OF PART OF THE FINANCE CHARGE."

 

Maybe this will be the norm from now on? Today, it's all about over disclosure that's for sure. 

Nov 16, 2007 03:22 AM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public
I have also seen it disclosed in that manner.  In my opinion, this type of disclosure is more accurate than the statement that there "May" be a prepayment penalty.  The addition of this FHA specific disclosure on the TIL is more descriptive of the prepayment requirement for these loans and is more easily understood by the borrowers.
Nov 16, 2007 03:36 AM
Rebecca Fair
Mobile Notary Services - Vero Beach, FL
I agree, Theresa.
Nov 16, 2007 04:36 AM
y y
/LSONHC';/.c - Denver, CO

Hi Theresa,

 

just read your blog and have to agree with you on the interpretation on prepayment; the lender's TIL seemed a little overkill by suggesting the interest due should be regarded as a prepayment penalty.  What struck me even more peculiar to your story was that the loan officer didn't even bother to show up to the closing until there was a problem.  As far as I'm concerned, that's a cardinal sin.

Nov 19, 2007 04:56 AM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

This was a new home purchase and the closing was in the offices of the builder's in-house title company.  The normal protocol for their closings is for the loan officer to meet briefly with the buyer to present the appraisal and to collect any outstanding loan stips., then the title closer (me, in this case) conducts the closing.  If any issues arise during the closing, the loan officer is just a few doors away, as is the builder representative should there be any construction issues needing resolution.  The last person the buyer sees is a customer service rep. who provides company contact information in the event issues arise after move-in.

In this case, the loan officer had presented the buyer with his appraisal and I was conducting the closing when the prepayment disclosure on the TIL came into question.  At that point I contacted the L.O. for clarification while continuing with the other documents.  In the end, although the L.O.'s explanation was not entirely satisfactory to the borrower, he did sign the TIL and the closing was completed.

When "outside" lenders (other than the builder's in-house subsidiary) are used, in my experience it has been rare for the L.O. to attend the closing.  If the buyers were represented by a real estate agent or Realtor, they do attend the closing in most cases.

90% of the closings I perform are refinance or reverse mortgage closings and the closing is performed in the borrower's home.  For these closings it is unusual for the L.O. to attend, but I will normally be given a contact number in case there are questions during the closing.

Thanks for your comment.

Nov 19, 2007 05:32 AM
Terry Lynch
LAR Notary and Closing Services - Saint Clair Shores, MI

Rebecca mentioned the part about possibly being entitled to a refund of part of the finance charge.

That means you may get a prorated portion of your upfront MIP payment returned, which is required on all FHA mortgages. If you pay off the loan in either 5 or 7 years you can get this money back.

This sounds like a loan officer who hasn't prepared his client to me. 

Nov 20, 2007 12:34 AM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

Terry, thanks for your comment.

This was a first time buyer and he was being helped through the transaction by his father.  The only issue they had was the TIL disclosure regarding the possibility of a prepayment penalty.  This particular lender treated this disclosure with a very narrow interpretation that was confusing to both the borrower and myself.  In the end, he grudgingly accepted the L.O.'s explanation and we completed the transaction.

Nov 20, 2007 12:55 AM
Teresa A Burrell
Burrell Closing Service Inc. - Orlando, FL
Mobile Notary Public

Wow!  Just the information I was looking for.  Has HUD established a deadline for lenders to comply with this revision in the prepayment disclosure? 

I've always been aware of the requirement to prepay on the payment due date but had never seen this classified as a possible prepayment penalty on the TIL until this particular closing.  On my next FHA loan I will now be prepared for the inevitable questions regarding this disclosure.

Thank you, Eric!

Nov 20, 2007 11:08 AM
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

I learned this one the hard way.... at a closing!!!!

I had to talk to three different loan officers back at the office before I got my answer......

 

Feb 19, 2008 08:00 AM
Anonymous
chuck armbruster

Wonderful blog -- great comments and valuable experience!  I might just check in here once-in-a-while.

Jun 20, 2008 03:47 PM
#21
Denise OnullDell
Santa Clarita Mobile Notary - Santa Clarita, CA
Mobile Notary Public/Real Estate Agent

Teresa - Yes, what an excellent topic.  I learned a great deal.  Thanks!

 

 

Jul 19, 2008 07:05 AM