Home & Garden

A policy switch at FHA

Hundreds of thousands of home sellers have had their pockets picked at closings during the last decade – they’ve been charged interest on their mortgages after their principal debts had been fully paid off.

But thanks to a policy switch made final last week, charging extra interest payments on loans insured by the Federal Housing Administration will soon be banned. FHA, which traditionally has served as a major source of financing for moderate income first-time buyers, many of them African-American and Latino, for years has allowed lenders to charge borrowers a full month of interest when they sell or refinance a home. This has been the case even when borrowers pay off the mortgage weeks in advance of the end of the month.

Why? Good question. The Consumer Financial Protection Bureau essentially posed it to FHA last year: Aren’t you allowing lenders to soak hapless consumers with post-payment penalties at closings when they have no alternative but to pay up? And, more to the point, didn’t the Dodd-Frank financial reform legislation of 2010 prohibit penalties of this sort? How is your policy, which sometimes results in unexpected extra charges of hundreds of dollars, legal?

Realtors applaud reform

The National Association of Realtors has railed against FHA’s policy for more than a decade.

Asked for comment on FHA’s policy change, Realtors association president Steve Brown said he applauded the move, which was “long overdue” and should “result in cost savings for millions of Americans who rely on FHA-insured loans to purchase their homes.”

Details of change

Here are the details of the policy reform: Starting Jan. 21, new FHA mortgages will require lenders to collect interest only on the balance remaining on the date of closing for a home sale or refinancing. Under the revised policy, if you’re selling your home and you have a $150,000 balance left on your FHA loan, the lender will have to stop charging you interest on the date of the closing, not compute the interest charges that would be due through the end of the month and roll them into your bottom line.

In guidance published in the Federal Register, FHA urged lenders not to find new ways to penalize borrowers. The agency said they should “look elsewhere” to recoup whatever revenues they expect to lose by virtue of the policy change, and continue “to offer consumers the same interest rates that they offer now,” rather than finding some way to tack on a premium.

FHA more attractive?

So could these changes make FHA more attractive to borrowers compared with the alternatives? Yes, but there are two caveats: Sellers and refinancers who currently have FHA loans and expect to close before Jan. 21 won’t likely see much benefit. Plus FHA’s other current negatives – super-high mortgage insurance premiums that are non-cancellable for extended periods – won’t be disappearing.

Nonetheless, FHA remains the go-to choice if you have minimal down payment cash (3.5 percent), issues in your credit files and you are not eligible for a VA loan, which is the best deal around with zero down and generous underwriting.