March 20, 2024
FHA loans typically involve some form of escrow. Some FHA loans have different escrow requirements than others and you should know what your specific loan type will require before you commit.
What Is Escrow?
Finance blogs often describe escrow as an arrangement where a third-party account retains money to facilitate a home loan.
It’s done on behalf of the borrower and lender and money comes out of the account based on specific conditions or instructions.
You can expect to use escrow to pay for property taxes, paying contractors for labor or materials, and even earnest money if you and the lender agree.
Escrow provides a layer of protection for both borrower and lender and it pays to know as much as you can about how it works before you commit to a home loan.
FHA Purchase Loans
When you buy a home, there are property taxes and homeowners insurance that must be paid monthly, and escrow can be used to do so.
Escrow may also be needed if the purchase transaction includes the FHA energy-efficient mortgage option, which allows extra money for approved home upgrades. Those funds would be spent via escrow.
FHA Construction Loans And Rehab Loans
Why do you need an escrow account for a construction loan or an FHA 203(k) rehabilitation loan? Primarily because contractors must be paid and the loan money can’t pass through the borrower’s hands.
Escrow payments to contractors and suppliers on a construction or renovation project go directly from escrow to the contractor or supplier.
At no time does the money pass through the loan applicant’s account, and the borrower does not control where the money goes beyond the agreements they may with the lender.
FHA Reverse Mortgages
A reverse mortgage is one in which a qualifying borrower (aged 62 or older, owning the home outright or close to owning it completely) applies for an FHA mortgage, which offers cash back at closing based on the appraised value of the property.
An FHA reverse mortgage is declared due in full when the borrower dies, sells, or stops using the home as their primary residence.
It may also be declared due in full if the borrower does not abide by the loan terms, which include staying current on all property tax obligations.
The property taxes are paid using escrow, which is often safer for reverse mortgage borrowers than trying to write a check or remembering to make an electronic payment at tax time.
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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