April 15, 2016
FHA loan rules in HUD 4000.1 have several things to say about escrow accounts. FHA loan rules don’t require escrow for every single home loan or refinance loan, but there are cases where escrow is a must and there are also lender standards which may require setting up an escrow account to pay certain expenses associated with the transaction.
FHA loan transactions may require escrow for payments to builders in association with construction loans, rehab loans or reverse mortgages. The standards and circumstances vary from loan to loan, so if you aren’t sure whether an escrow account is needed for your FHA loan transaction, discuss your situation with the loan officer. In some cases escrow is used to pay property taxes, in others it may be used to disburse funds as required by FHA loan rules for a certain type of loan.
FHA loan rules govern certain aspects of escrow accounts used for FHA loan transactions. One common question borrowers have about these accounts is whether or not FHA rules have anything to say about the payment of interest. Is an interest-bearing escrow account required? Forbidden? HUD 4000.1 page 544 states,”HUD regulations neither forbid nor require that escrow accounts earn interest.”
But if an escrow account is used, the lender must “pass on to the Borrower the net income derived from the investment in accordance with the following:
–The Mortgagee must make investments and payments in compliance with state and federal agency requirements governing the handling and payment of interest earned on a Borrowers escrow account.
–The Mortgagee may only deduct the actual cost of administering the interest- bearing account before passing on to the Borrower the net earnings from the investment of their funds.
–The Mortgagee may not charge the Borrower expenses for maintaining the interest-bearing escrow account in an amount exceeding the gross interest earned from investing the funds in that account.”
The rules for handing escrow accounts includes how funds are to be paid out, and when. For example, the lender is required to “send payment directly to the billing agency or the taxing authority, or as otherwise directed by state or local law;
request a bill from the billing agency if a bill has not been received within a reasonable amount of time before the payment due date” and the lender is required to “ensure that all Disbursements are made as bills become payable.”
What happens if the lender (also known as the mortgagee) fails to pay on time? “The Mortgagee is prohibited from passing on to the Borrower any penalties resulting from the late payments unless:
–the late payment was the result of the Borrowers error or omission; and
–the Mortgagee attempted to obtain the billing information from the Borrower, billing agency, or the taxing authority in sufficient time to enable it to timely make the Disbursement.”
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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