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 w
hen 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 1st 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 2nd or 3rd 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.”
Wow, this is great information! I had no idea. We will probably begin to see more FHA seller closings moving forward since FHA has once again become such an integral part of mortgage financing over the past few years.
Thanks, Peter!
Great information to know. Thanks!
Don’t know if this still applies because of recent FHA changes but. I’m scheduled to close a conventional refinance on May 17th 2013. I was just told by my current loan holder (Well’s Fargo) that the loan can not be paid off until June 1st. They also said that the payoff amount includes not only my principle balance but a full month of interest for June and an addition prorated Mortgage Insurance Payment equal to 3 times my normal monthly Mortgage Insurance Payment. I was supposed to have NO PREPAYMENT PENALTIES, what are all these additional charges? Is this something I can fight?
I’m doing something similar and was wondering why I’m paying double my normal MIP at payout
Yes I came across this shocker too. Wfargo told me that I have to pay interest for the entire month of june and also double the PMI
In the same position with Wells. I close tomorrow, 10-25, but Wells is still requiring me to pay all the interest for November. It just seems incredibly wrong and predatory. Do we have any legal recourse?