by Stephen L. Fussell, Information Officer
Congratulations! One of your listings just went under contract. Now you can sit back and relax!...Or can you?
Although the selling agent usually assists the buyer with the loan application, inspections and related arrangements, you as the listing agent have at least one very important obligation if the property under contract is financed by an FHA-insured loan: You must notify the lender that the loan will be paid off.
HUD regulations allow mortgages insured by the FHA prior to August 12, 1985. to be prepaid "in full on the first day of any month in the term of the mortgage (i.e.. on an installment due date) without penalty provided the mortgagee receives 30-day prior written notice of intent to prepay." The 30-day period begins on the date the lender receives the notice, and the notice is valid for a minimum of 90 days after receipt.
When prepayment is offered on any date other than the installment due-date, HUB regulations allow the mortgagee the option of refusing "prepaying until the first day of the month following expiration of the 30-day notice period as provided in the mortgage or requiring the payment of interest to that date, but only if the mortgage. so advises the mortgagor in a form approved by HUD."
For example, when a listing goes under contract on February 15, the lender must receive written notice by March 1 to pay off the loan on April 1; otherwise, the lender may be able to charge interest for the entire month of April and pay off the loan on May 1. The interest will be charged on the actual unpaid principal balance of the debt.
Mortgages insured by the FHA on or after August 2, 1985, do not require a 30-day written notice when prepayment is offered on the first of any month. However, when prepayment is offered on any date other than the installment due-date, the mortgagee may refuse prepayment until the next due-date or may require the payment of interest to the next due-date. but only if the mortgagee so advises the mortgagor on a HUD-approved form. Upon notification, the lender must send a copy of the FHA payoff terms to the mortgagor even though the lender has been dealing with an agent of the mortgagor.
The best time to notify the lender is immediately after the property is listed for sale. A written notification that includes the seller's name, address, mortgage loan number, and the seller's signature is sufficient. For the purpose of verification, you are wise to request the lender to provide the mortgage balance, monthly payment amount, escrow balance, type of loan assumption requirements, and prepayment terms.
By promptly notifying the lender of an FHA loan payoff, you are preventing unnecessary interest charges (thereby protecting the seller's interest) and are thus eliminating a potential conflict between yourself and the seller.