A:

Unlike subprime mortgages issued by some conventional commercial lenders, Federal Housing Administration (FHA) loans do not have prepayment penalties. Rules governing FHA loans state that these type of mortgages cannot contain any unnecessary fees, such as a due-on-sale clause or prepayment penalty, that may cause a financial hardship to borrowers.

How Mortgage Interest Is Calculated in Case of Prepayment

For all FHA loans closed before Jan. 21, 2015, while you are not required to pay extra fees when paying your FHA loan early, you are still responsible for the full interest as of the next installment due date. For example, assume the monthly payment due date of your FHA loan is on the fifth of every month. If you made your monthly payment by the first of the month, you are still liable for the interest until the fifth. Even if you paid the full balance of your mortgage, you are still responsible for the interest until the payment due date.

This post-payment interest charge was not a prepayment penalty, but many homeowners felt it was; in 2012, holders of FHA loans paid an estimated $449 million in post-payment interest charges. To reduce the burden on homeowners, the FHA revised its policies to eliminate post-payment interest charges for FHA loans closed on or after Jan. 21, 2015. Under these new policies, lenders of qualifying FHA loans must calculate monthly interest using the actual unpaid mortgage balance as of the date the prepayment is received. Issuers of FHA loans can only charge interest through the date the mortgage is paid.

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RELATED TERMS
  1. FHA Loan

    A mortgage issued by federally qualified lenders and insured ...
  2. Federal Housing Administration - FHA

    A United States government agency that provides mortgage insurance ...
  3. Prepayment Penalty

    A clause in a mortgage contract that says if the mortgage is ...
  4. FHA 203(k) Loan

    A type of federally insured mortgage product for individuals ...
  5. Mutual Mortgage Insurance Fund

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  6. Prepayment Privilege

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