October 8, 2015
When the FHA and HUD switched over to the new FHA Single Family Home Loan policy handbook (HUD 4000.1), it restated some policies, redefined others, and made additions where needed.
We’ve been examining FHA loan rules as published in HUD 4000.1 over a variety of topics to help borrowers and lenders alike understand FHA policy as it now stands in the new rulebook.
One area some borrowers need information on is escrow accounts. FHA loan regulations address the use of escrow, but do not require it. Your lender might, and is free to do so under the FHA Single Family Home loan program, so it’s good to know the rules.
The first thing HUD 4000.1 does is to define the term “escrow”:
“An Escrow Account is a set of funds collected by the Mortgagee for payment of taxes, insurance, and other items required by the mortgage Note.”
Next there’s a definition of the FHA standard for escrow:
“The Mortgagee must segregate escrow funds, including those funds escrowed at
closing, and deposit the funds in a special custodial account characterized by the
following:
–with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA);
–that does not limit the Mortgagees access to funds, require an advance notice of withdrawal, or require the payment of a withdrawal penalty; and
–that clearly identifies the type of funds being held in that account.”
Furthermore, lenders who use a “trust clearing account” are required to, “withdraw the portion that is to be applied to escrows within 48 hours of the deposit and must transfer the portion to the escrow account for the Borrower’s Mortgage.”
Mortgagees are not prohibited from holding escrow funds for all types of Mortgages in a single bank account; however, the Mortgagee must not commingle escrow funds, even temporarily, with funds used for the Mortgagees general operating purposes.”
Does the FHA require the lender to pay interest on the funds deposited in the escrow account? According to HUD 4000.1:
“HUD regulations neither forbid nor require that escrow accounts earn interest. However, if escrow funds are invested, the Mortgagee must pass on to the Borrower the net income derived from the investment in accordance with the following:
–The Mortgagee must make investments and payments in compliance with state and federal agency requirements governing the handling and payment of interest earned on a Borrowers escrow account.
–The Mortgagee may only deduct the actual cost of administering the interest bearing account before passing on to the Borrower the net earnings from the investment of their funds.
–The Mortgagee may not charge the Borrower expenses for maintaining the interest-bearing escrow account in an amount exceeding the gross interest earned from investing the funds in that account.”
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is a free widget designed especially for real estate websites widget that displays FHA loan limits for the counties serviced by those sites.
It’s very simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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