FHA Prepayment Penalty and 3 Day Right of Rescission
by Maria W. from Sacramento, CA
Ask Kate about FHA prepayment penalty news and 3 day right of rescission: Maria's mortgage refinance has been caught in a vicious cycle. The lender botched paying off her FHA financing by the end of the month, necessary to avoid a prepayment penalty of 30 days interest. Now she's afraid that her 3 day right of rescission period ended before she could cancel her refinance. Maria asks for her next step.
Late FHA Payoff and 3 Day Right of Rescission By Maria W. from Sacramento, CA
Can I cancel after the rescission period?
We are trying to refinance our mortgage with our current provider. We agreed to a higher APR to have a no-cost refinance. We currently have an FHA loan.
Our closing coordinator has been terrible, she doesn't explain documents when asked and has forgotten several documents which then she "catches up on". It has been 8 weeks since we applied.
We contacted her concerned that the loan would not close in time before the first of the month as we'd have to pay a full month's interest on our FHA loan. She said not to worry.
We closed and signed all documents on Friday 11/21/14. She contacted us needing more signatures on Tuesday 11/25, we fulfilled her request within a couple of hours. She then requested us to mail a check for "increased escrow". We did so.
On Tuesday 11/25, she said the loan had been authorized. We tried to reach her on Wednesday 11/26 without success. Thanksgiving began on 11/27 and the next business day at their office is on the first of the month (Monday).
So here we are, already paying interest on our new loan and facing the possibility of having to pay a full month's interest on our old loan. Our rescission period has ended. Is there a way we can back out of the loan to avoid paying even more money?
What do you recommend?!
Ask Kate answers: FHA Prepayment Penalty News and 3 Day Right of Rescission
When a lender tries to close a refinance that is paying off a Federal Housing Administration (FHA) home loan
exactly on the last day of the month, the borrower often ends up paying a prepayment penalty.
Here's some background...
FHA-Insured Financing Prepayment Penalty
For the majority of mortgage programs, lenders prorate interest in the month that the loan is paid off. Although convenient to close near the end of the month, should the transaction go over a few days, the borrower only pays interest up until the time the loan is paid in full.
Conversely, when a refinance paying off FHA financing is not closed by month's end, borrowers are stuck owing another full month of interest. In essence a prepayment penalty, the interest often adds up to hundreds of dollars.
Missing the closing by a day or two, some lenders even instruct borrowers to delay their closing until the end of next month. You can guess what follows. The funding date is missed again. Thankfully, HUD has made an announcement that should end the need to close at the end of the month.
HUD Announces Elimination of Interest Charges After Payoff
On August 14, 2014, the U.S. Department of Housing and Urban Development (HUD) announced that interest cannot continue to be charged after FHA financing is paid in full. This applies to FHA-insured mortgages closed on or after January 21, 2015.
This means that lenders will be able to prorate interest in the month that FHA-insured financing is paid off, eliminating the prepayment penalty when the lender misses the end of the month closing.
If the 3 Day Right of Rescission Passes
Of course, this is still 2014. So, I am assuming you are being charged the prepayment penalty and that you want to exercise your 3 day right of rescission.
Without delay, call the lender to see if the rescission period is still open. Additionally, you could enlist the help of your closing agent. If you decide to exercise your right, confirm the proper steps to rescind. Make sure you keep the lender and the closing agent in the loop. Document each step. Rescissions must be exercised in writing.
If the rescission period has ended, you still have options. You could...
1. Bite the bullet by keeping the new financing. Pay the interest but make sure you never return to this lender for financing again.
2. Jot down a detailed timeline of past conversations with the Loan Coordinator. Document the subject of each conversation. Note the date you placed calls and when they were returned. Send it to the manager of the lending office and plainly request a refund equal to the full month's interest.
3. Contact the Consumer Financial Protection Bureau (CFPB), established by Congress to protect consumers, at 855-411-2372. CFPB will forward your complaint to the lending institution which has 15 days to respond to you and CFPB. In general, CFPB gives the mortgage companies 60 days to achieve a resolution. Afterward, you can send feed back to CFPB.
4. Contact an attorney for legal options.
What Is the 3 Day Right of Rescission?
After signing final loan documents, homeowners experience a three day waiting period before the mortgage is finalized. During this time, the borrower can rightfully exercise their right to cancel.
Although occasionally perceived as an inconvenience, the cooling off period is meant to protect homeowners. Read about the 3 day right of rescission at Truth in Lending Act Protection
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