When you buy a home with an FHA loan your lender may require you to use an escrow account. This is especially relevant for those who seek One-Time Close construction mortgages, FHA 203(k) Rehabilitation loans, and any other home loan that may require an account to pay for contractors, materials, etc.
FHA Reverse Mortgages also require escrow for the payment of property taxes–all Reverse Mortgage borrowers are required to stay current on property taxes as a condition of loan approval.
But what is escrow and how does it work?
An escrow account is basically a bank account used to hold the money you need to make a good faith deposit, property tax money, etc.
The cash is deposited and held on account until the time comes to make the payments.
You may be required to have an escrow account for the home buying process, and you may be required to have one for the lifetime of your mortgage for making payments (such as the previously mentioned property tax payment requirements, etc.).
Escrow is useful in cases where a certain payment is scheduled but must be delayed. Cases where the buyer and seller decide to delay the move-out day for the seller, for example.
Or where an issue was discovered that must be addressed before the borrower can close the loan. In these situations, an “escrow holdback” may be necessary.
Those who choose a One-Time Close construction loan will use escrow to pay contractors, but the money may sit in escrow until the borrower has approved the labor–the borrower is required to be involved in the process of payment in such cases so putting money in escrow is not a “fire and forget” type function.
When using escrow after the loan has closed (to pay property taxes and other expenses), you will likely have your monthly mortgage calculated with these expenses and that sum will be set aside in escrow until the payments come due. You won’t have access to those funds once they are in escrow, but they will remain there until the pay date.
Remember, taxes and other expenses that may be part of your monthly mortgage payment are subject to change.
If your payment is adjusted in ways you don’t understand, ask your loan officer to explain those changes and where they occur. You may discover your property taxes or other expenses have been adjusted.
In some cases the adjustment might happen in the cost but not in the amount you were charged. Your lender will occasionally check your escrow account to make sure it isn’t charging too much or too little.
If you overpaid, you may be due a refund but if the adjustments occurred and you underpaid for a time before the adjustment was noted, you may be required to make a payment to correct the shortfall.