October 23, 2012
Many home loan applicants find themselves opening escrow accounts at the request of their lender for such things as property taxes and other expenses related to owning a home purchased with an FHA mortgage. While the FHA loan program does not require an escrow account, the lender may.
The FHA official site reminds borrowers and lenders alike that it’s misleading for any lender to imply that FHA loan rules issued by the Federal Housing Administration require escrow; this is not true but the lender is free to do so.
The FHA official site says of escrow, “Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The additional escrow account regulations became effective in October 1997.”
This means there is accountability and transparency required as part of the process of opening and maintaining an escrow account.
The Escrow Cushion
According to one FHA frequently asked questions list, “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.”
Additionally, “The accounting method generally requires borrowers to maintain lesser amount in the account than the single-item method predominately used by lenders. However, many lenders have recently increased the escrow account cushion to the maximum allowed by law.” Your lender is not required to pay you interest on the money deposited in escrow for FHA loan purposes.
Other important details about escrow you need to know–the lender’s required disbursement date for paying things like property taxes from your escrow account. “The disbursement date means the date on which the lender actually pays an escrow item from the escrow account.”
“However, the lender must pay the items in a timely manner, that is, on or before the deadline to avoid a penalty. This is required as long as the borrower’s payment is not more than 30 days overdue.” The FHA advises all borrowers to annual escrow statements, “to make certain the lender did not make late payments and charge any penalties to the borrower’s account.”
Do you have questions about FHA home loans? Ask us in the comments section.