The Department of Housing and Urban Development official site at www.hud.gov offers a large amount of valuable resources for first time home buyers interested in purchasing a home with an FHA guaranteed mortgage loan.
Among those resources are details of the Real Estate Settlement Procedures Act (RESPA) which governs a variety of aspects of the home loan process. One of those aspects is the escrow account–something many lenders may require as a part of doing business in a home loan transaction.
What does RESPA say about escrow accounts? For starters, the FHA does not require an escrow account as a condition of loan approval. Escrow accounts may be required by the lender, but no lender should be telling you it’s because of FHA requirements or RESPA laws.
HUD does regulate some aspects of escrow–according to the FHA official site, “The HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account.”
The same goes for the “cushion” some lenders may ask FHA borrowers to maintain in their escrow accounts. According to the FHA/HUD official site, “The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails.”
One important feature/issue related to the escrow account that first-time FHA loan applicants should be aware of? Timely payments. The escrow account is set up so the lender may transfer funds for payment on items such as property taxes or other charges as specified in the loan agreement.