July 30, 2015
There are many FHA loan questions regarding the use of escrow accounts, especially when it comes to new purchase loans. Applicants sometimes get confused when the lender requires an escrow account. Since FHA loan rules do not require the use of escrow, some borrowers may wrongfully believe they don’t have to use them, period. But your lender may require the use of escrow and this is fully permitted under the FHA loan program.
In fact, FHA loan rules anticipate some lenders requiring escrow for a variety of loan transactions; one use of escrow is to collect and pay property taxes. According to the FHA/HUD official site, “It is the lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. The HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account.” The Real Estate Settlement Procedures Act (RESPA) does not require escrow.
However, according to HUD 4155.2, Chapter Six, Section A, we learn the following:
“The lender may project real estate tax payments, and collect those funds as a portion of the monthly escrow account payment without violating the Real Estate Settlement Procedures Act (RESPA).
RESPA requires that a borrower receive an initial escrow account statement at settlement or within 45 days of settlement. In conducting this analysis,
RESPA permits lenders and mortgage servicers to project the disbursements for real estate taxes for the ensuing 12 months and collect funds based on this
projection.”
When it comes to new construction FHA loans, Chapter Six of HUD 4155.2 states, “On a newly-constructed dwelling, however, the lender must not predicate a
borrowers monthly escrow payments on the value of vacant land when tax authority reassessments are likely to occur within 12 months of mortgage loan
closing.”
Does RESPA or HUD require the lender to maintain a “cushion” in escrow? According to Chapter Six, federal regulations “do not require the lender to maintain a cushion.” That said, Chapter Six reminds us, “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.”
Furthermore, “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.”
Borrowers who have specific questions as to whether escrow is required in their transaction or how it is to be managed should discuss the escrow arrangements with the loan officer.
Do you have questions about FHA home loans? Ask us in the comments section.
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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