FHA Tweaks Interest Rate Rules to Align with QM
The Federal Housing Administration is changing a rule that will make it more flexible for home sellers to schedule closings without being penalized by interest charges.
Currently, FHA borrowers selling or refinancing a home must make a full month's interest payment whether they close on the fifth day or 20th day of the month. To avoid this extra charge, closings on FHA-insured loans are generally scheduled toward the end of the month.
The extra interest payments generally ended up in the pockets of Ginnie Mae mortgage-backed securities investors. But the Consumer Financial Protection Bureau considers these post-settlement charges to be prepayment penalties, which are prohibited under the qualified mortgage rule. The QM rule forced the FHA to reverse its policy that favored Ginnie Mae MBS investors.
"This rule explicitly prohibits lenders from charging borrowers post-settlement interest" on all FHA-insured single-family loans, the agency said, starting Jan. 21, 2015.
The change also brings FHA requirements in line with conventional loans that are guaranteed by Fannie Mae and Freddie Mac, according to mortgage consultant Brian Chappelle.
"This will have a positive impact because it will spread out closings. It will eliminate the need to schedule closings at the end of the month," the Washington consultant said in an interview.
The FHA also announced Tuesday that it is changing its notification requirements regarding interest-rate adjustments on adjustable-rate mortgages.
Starting Jan. 10, 2015, lenders and servicers must give borrowers of FHA-insured ARMs at least 60 days (but no more than 120 days) advance notice of an adjustment to their monthly payment. The FHA currently requires advance notice of just 25 days.
The final rule also changes what is known as the "look-back period" to conform to the QM rule.
In making interest-rate adjustments, the lenders must use the most recent index value available 45 days before the date of the rate adjustment. The FHA currently requires a 30-day look-back period.