Scheduling Closing With FHA Payoffs

 

It is conventional wisdom that the best time to close a home sale is at the end of the month. Closing at the end of the month means buyers bring less cash to closing. While closing at the end of the month might be more convenient for buyers, it can result in a hefty penalty for Sellers who need to pay off FHA loans. Realtors, attorneys, and sellers need to plan carefully when the seller has an FHA mortgage.

Most mortgages will charge interest for each day that the mortgage goes unpaid. The only extra costs to closing later in the month, or into the next month, are the added day(s) of interest. FHA Mortgages, on the other hand, charge interest in one month chunks. One full month of interest is due, without refund, on the 1^st day of each month. Closing on the first few days of the month will result in paying for a full month of interest even thought the seller no longer owns the property. So, it would appear to be best to close on the last day of the month.

Not so fast. A seller that closes on the last day of the month may not be able to get their FHA payoff to the bank until the 2^nd or 3^rd day of the next month. This will result in a hefty, non-refundable, one-month interest penalty. And the title company may not be able to wire out funds immediately after closing to meet the end-of-month deadline. Wire deadlines range from 1pm to 3pm. In addition, wires that arrive at the receiving bank after 3pm will not be credited until the next business day. And wires can take many hours to travel from one bank to another.

If you know your seller has an FHA mortgage that is being paid off, make sure to schedule closing with at least one business day remaining after closing. This will be a quieter time for the title company and lender, will mean less volume and more attention to your file, and will prevent that nasty, one-month interest “penalty.”