Do FHA loans have a pre-payment penalty?
When shopping for a mortgage it is important to fully understand the costs of financing the home and the terms of the mortgage program you are applying for. There are some mortgage programs that will have a pre-payment penalty which could result in a costly expense should you payoff the mortgage soon after the home purchase.
Do FHA Loans Have a Prepayment Penalty?
FHA loans are designed to help people with lower income, savings and financial hardships to purchase a home. As a result, the guidelines do not permit pre-payment penalties or any other costly and unnecessary fees to be included in the purchase of a home with an FHA insured mortgage.
What is a pre-payment penalty?
A pre-payment penalty is a fee the lender will charge the borrower if they sell the home or refinance the mortgage before a specified period of time. Pre-payment penalties are typically in place for a period of three years.
The pre-payment penalty fee is a percentage of the loan amount and that fee will become smaller as time passes. The good news is this fee does not exist with FHA loans.
How is a pre-payment penalty calculated?
A pre-payment penalty is calculated based upon how long the mortgage has aged since its origination date. In most cases, the pre-payment penalty will be for a period of three years and it would work like this:
- If the mortgage is paid off in the first year, the pre-payment penalty is 3% of the loan balance
- If the mortgage is paid off in the first year, the pre-payment penalty is 2% of the loan balance
- If the mortgage is paid off in the first year, the pre-payment penalty is 1% of the loan balance
This is a 3-2-1 payment schedule based upon how much time has passed. If your loan amount is $200,000, then the actual penalty for paying off your mortgage or selling your home before the three year mark would be as follows:
Loan Amount of $200,000
Penalty in Year 1 = $6,000
Penalty in Year 2 = $4,000
Penalty in Year 3 = $2,000
These pre-payment penalties would exist with a subprime loan. You can see they can be expensive so it is important to know what your plans are before entering into a mortgage agreement where a pre-payment penalty exists.
Can I make a lump sum payment on my FHA loan?
You are permitted to make lump sum or early payments on an FHA loan to help save on interest over the life of the loan. Every lender will have a specific process on how to make a lump sum payment. It is best to check with your lender before sending the additional payment or simply making your upcoming mortgage payment for a higher amount.
Do Conventional Loans Have Prepayment Penalties?
Prepayment penalties for conventional loans were industry standard years ago. Today, you do not see prepayment penalties as part of the terms on a conventional loan. If the quote from a lender includes a prepayment penalty, then we suggest checking with other lenders.
| Types of Loans that Have Pre-Payment Penalties | Yes/No |
| FHA | No |
| VA | No |
| USDA | No |
| Conventional | No |
| Investment | Yes |
| Subprime | Yes |
When is it Okay to have a Prepayment Penalty?
If you are making a decision on whether to move ahead with a mortgage that has a prepayment penalty, you will need to weigh the pros and cons for your specific situation.
- Are you planning to keep the home for a long time?
- Are you more concerned about the monthly payment?
- Are you looking for the smallest down payment possible?
The answers to some of these questions may tell you that a mortgage with a prepayment penalty could be the best option. If you would like help in making that decision, then simply contact us and we will help.
What is The Penalty for Selling an FHA Home Early
There is no penalty for selling an FHA loan early. However, if sold within the first 90 days, the home is ineligible to be financed with an FHA loan by the next buyer until the 90 day waiting period has passed. When the next buyer attempts to purchase the home with FHA insured financing, the decision may rest upon the judgement of the underwriter. One of the elements that will make a difference is whether the new sell price is significantly higher than the prior sell price.
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