Daddy Why Did You Used to Have to Close at the end of the Month?

The old rule of thumb is that you want to close on your home at the end of the month. Hopefully that will soon become one of those old wife’s tales.

FHA being forced to end collection of full month's interest by Consumer Protection Bureau.

FHA being forced to end collection of full month’s interest by Consumer Protection Bureau.

For now though, it is done due to FHA policy on collecting pre-paid interest for the entire month regardless of when the sale closes. So if you sell your home on August 15, then you get to give FHA a “free gift” of 1/2 that month’s interest. No other major mortgage carrier – not Freddie Mac or VA – does anything similar.

And the rule will have to change effective January 1, 2014, to be in line with new rules from the Consumer Protection Bureau though FHA will get up to a year’s extension to implement the change – so effectively it won’t change until 2015.

The Consumer Protection Bureau found that collection of the “free gift” was in essence a prepayment penalty. And as of January 1 there is to be no prepayment penalties on any mortgages offered to home owners. Thus causing a major challenge for FHA which is estimated to have collected $548 million in “free gifts” in 2003.

Hopefully soon our children will be asking why we used to always fight for closings at the end of the month rather than when it was ready to close.

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