November 11, 2010
In our last post, we discussed escrow accounts, which a lender may require to be set up in connection with an FHA loan in order to pay mortgage insurance, property taxes and other expenses with no fear of missed payments or penalties for late payments.
When a lender sets up an escrow account in the buyer’s name for these purposes, they often add the costs of the insurance and other payments into the mortgage, making one simple payment for the buyer. The extra money is placed into escrow and held until it is needed to pay the insurance, taxes or other items.
The FHA does NOT require this arrangement, though it does not forbid the lender from doing so.
But the FHA does place limits on the maximum amount the borrower must keep in that escrow account.
According to the Department of Housing and Urban Development official site, since 1976 RESPA laws permits lenders to maintain a “cushion” in the escrow account, but that amount is limited. It must be “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.”
Some lenders may try to increase the amount of the cushion on some escrow accounts, but the lender should not try to blame FHA requirements for increased cushion size or the need for escrow in general. According to HUD, it’s the lender’s call. As long as the escrow account maximums fall within FHA guidelines, the bank calls the shots.
It’s also important to note that FHA rules don’t require lenders to pay interest to the borrower on money stored in an escrow account. Some states have laws which require interest payments, but not all do–and the state requirement should not be confused with FHA loan requirements or federal law.
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.
Browse by Date: