VA Loans and Pre-Payment: Is There a Penalty?
One of the most attractive features of a VA-insured mortgage is the no-money down option. Borrowers who choose a zero-down payment may pay more in VA loan funding fees, but the money saved by not making a down payment can help a new borrower stay on budget and keep initial home buying expenses lower.
But some borrowers see the value in making a down payment, reducing the overall cost of the loan over the long term when it comes to interest rates and the lifetime of the loan itself.
A borrower who uses a large down payment and higher-than-minimum monthly mortgage payments can shorten the length of their loan. The borrower who sets a goal of paying off their VA home loan early is one who knows how much they can potentially save in interest payments over the life of the mortgage. One benefit of VA-guaranteed loans is there is no pre-payment or early payoff penalty, something that is common in conventional loans.
According to Title 38 of the Electronic Code of Federal Regulations, “The debtor shall have the right to prepay at any time, without premium or fee, the entire indebtedness or any part thereof not less than the amount of one installment, or $100, whichever is less.”
Additionally, the lender cannot wrangle a pre-payment fee by failing to credit the borrower with pre-payment on the date that payment is rendered. “Any pre-payment in full of the indebtedness shall be credited on the date received, and no interest may be charged thereafter.”
That federal regulation prevents the lender from delaying credit to the borrower’s account, thereby accruing additional interest on the loan until the early payment is permitted to be added to the record.
Partial pre-payments are a different matter.
According to the rules, “Any partial pre-payment made on other than an installment due date need not be credited until the next following installment due date or 30 days after such pre-payment, whichever is earlier. The holder and the debtor may agree at any time that any pre-payment not previously applied in satisfaction of matured installments shall be reapplied for the purpose of curing or preventing any subsequent default.”
When making such partial pre-payments, it’s important to understand the terms and conditions you’ve agreed to in your loan paperwork to avoid being surprised by when those partial payments are applied to your account.