An FHA Mortgage Trap for Home Sellers

Former FHA Commissioner David Stevens

Washington Post readers, please see update at the end

In the past five years, the FHA mortgage became the go-to option for home buyers looking to purchase a home with a small down payment. At the closing table they signed FHA loan documents with lines and lines of small print, and that small print is still in effect now that they (or you) plan to sell their home.

Do you have a FHA mortgage?

My personal mortgage statement does not tell me the type of loan I have on my home in Vienna, VA. It does tell me how much I need to pay, the tax and insurance escrow balances, payment history, and where to send the payment. But knowing you have a FHA mortgage is crucial information of you plan to put your house on the market or are negotiating an offer.

Why?

Because you will need to make sure and close (or settle) well before the end of the month so that your lender receives the payoff before the beginning of the next month.

FHA lenders shall collect a whole month’s worth of interest if they aren’t paid before the first of the month.

The fine print really stinks if you haven’t been reminded that your loan is an FHA Insured mortgage. In my opinion, the FHA should be ashamed of itself for allowing this fine print or trap to exist because it harms the home seller when they are most vulnerable.

Yes, your lender will collect a whole month’s worth of interest if they aren’t paid before the first of the month. If they get the payoff on April 2nd, then they collect interest for the entire month of April.

Sorry Charlie, they don’t pro-rate that amount from the date of the closing to when they get paid… they get a whole month’s worth of interest! It’s a dream come true, pure gravy because that fine print signed when you bought the house.

Here is my home seller tip: contact the company that holds your mortgage and ask if you have a FHA, Conventional or VA loan? They are only going to tell you, not your real estate agent. And don’t expect your title or escrow agent to tell you either… although the payoff instructions will tell them what to collect.

If you do have a FHA mortgage and you are selling your home, schedule the closing a week before the end of the month to ensure your documents get recorded at the courthouse and the payoff is sent to your lender by the end of the month.

A day late is gonna cost you a month’s worth of interest.

UPDATE: If you just read about this in the newspaper or online in an article by Kenneth R. Harney, please know that his advice is a little off the mark. Your lender needs to get the money before the first of the month and they don’t get it until the deed has been recorded at the courthouse, and deeds usually get recorded the day after your closing. My advice is to bank in one week before the end of the month to close to ensure your FHA lender gets the money before they can ~~rob you of~~ collect next month’s interest (see above).