What should I know about FHA loan escrow account rules? Depending on the nature of your transaction, lender standards, and other issues, you may be required to use an escrow account to complete or maintain your FHA mortgage.
The rules for escrow accounts to be used in FHA loan transactions are found in the FHA loan handbook, HUD 4000.1. The section governing escrow includes guidance that such accounts must be established in accordance with procedures defined in the Real Estate Settlement Procedures Act.
The escrow account must be maintained in order to meet monthly financial obligations including the following (where applicable) as found in HUD 4000.1:
-hazard insurance premiums;
-real estate taxes;
-Mortgage Insurance Premiums (MIP);
-special assessments, including any assessments related to a PACE obligation;
-flood insurance premiums if applicable;
-ground Rents if applicable;
-servicing, maintenance, repair and replacement of water purification equipment; and
-any item that would create liens on the Property positioned ahead of the FHA-insured Mortgage, other than condominium or Homeowners’ Association (HOA) fees.
Some FHA loan transactions may require a repair completion escrow account, which the FHA loan handbook addresses as follows:
“The Mortgagee may establish a repair escrow for incomplete construction, or for alterations and repairs that cannot be completed prior to loan closing, provided the housing is habitable and safe for occupancy at the time of loan closing. Repair escrow funds must be sufficient to cover the cost of the repairs or improvements. The cost for Borrower labor may not be included in the repair escrow account.”
Naturally this will not apply to all FHA loan transactions, but it’s common for rehab loans, new construction, etc. HUD 4000.1 says of repair completion escrow, “The Mortgagee must certify on form HUD-92051, Compliance Inspection Report, that the incomplete construction, alterations and repairs have been satisfactory completed” at the appropriate time.
There are other escrow account issues-for those considering the option of a temporary interest rate buydown, establishment of escrow is required. HUD 4000.1 instructs the lender, “The escrow agreement must not permit reversion of undistributed escrow funds to the provider if the Property is sold or the Mortgage is prepaid in full; nor allow unexpended escrow funds to be provided to the Borrower in cash, unless the Borrower funds were used to establish the escrow account.”
Again-not all borrowers are subject to these rules, but if and when your transaction does require escrow, it’s good to know the rules and regulations.