April 13, 2023
When buying a home, there are situations where the FHA home loan transaction requires an escrow account. HUD 4000.1 has a specific list of rules and regulations that govern escrow and how it is to be used for purchasing or building a home.
There are many scenarios where the lender will require an escrow account. A construction loan is a great example; you won’t be able to build a home without one.
In general, when escrow is used, we learn the following from the FHA Single-Family Lender’s Handbook, HUD 4000.1:
“The Mortgagee must collect a monthly amount from the Borrower that will enable it to pay all escrow obligations…” The escrow account must have sufficient funds for items including but not limited to the following:
- Hazard insurance premiums;
- Real estate taxes;
- Mortgage Insurance Premiums (MIP);
- Special assessments;
- Flood insurance premiums if applicable;
- Any item that would create liens on the Property positioned ahead of the FHA-insured Mortgage, other than condominium or Homeowners Association (HOA) fees.”
For repair completion, escrow rules include these guidelines:
“The Mortgagee may establish a repair escrow for incomplete construction, or for alterations and repairs that cannot be completed prior to loan closing, provided the housing is habitable and safe for occupancy at the time of loan closing.”
Furthermore, repair escrow funds “must be sufficient to cover the cost of the repairs or improvements. The cost for Borrower labor may not be included in the repair escrow account.”
The lender must use a HUD form to document that the repair escrow has been set up. Once the work is complete, the lender must use another form, a “Compliance Inspection Report”, to record that incomplete construction, alterations and repairs are finished.
There are also rules for setting up escrow for temporary interest rate buydowns. HUD 4000.1 says:
“The escrow agreement must not:
–permit reversion of undistributed escrow funds to the provider if the Property is sold or the Mortgage is prepaid in full;
–nor allow unexpended escrow funds to be provided to the Borrower in cash, unless the Borrower funds were used to establish the escrow account.”
Payments must be made by the escrow agent “to the Mortgagee or servicing agent” according to HUD 4000.1, which adds, “If escrow payments are not received for any reason, the Borrower is responsible for making the total payment as described in the mortgage Note.”
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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