November 11, 2010
If you’re thinking of buying that first home, you’ve probably read plenty of real estate articles and brochures with a wealth of new vocabulary. One of these is “escrow”.
Until applying for an FHA home loan, many people have never needed an escrow account so it’s no surprise that “What is an escrow account and why do I need one for an FHA mortgage?” is such a common question.
An escrow account is defined simply as an account “used to collect and hold funds to pay your property taxes, homeowners insurance premiums or other charges when they become due” according to FannieMae.com.
The way escrow accounts often work in connection to FHA mortgages is easy to understand–if a lender sets up an escrow account on your behalf for property taxes and insurance, the amounts of these payments is added to your monthly mortgage bill. If the taxes and insurance totals $150 a month, for example, your bill includes that extra $150. The extra amount is placed into the escrow account until it is time to pay the mortgage insurance and property taxes.
The advantage to having an escrow account for your FHA loan? You avoid being charged extra for late fees or other issues–you won’t miss paying property taxes or insurance, so there are no late fees or penalties to worry about. You also don’t write a separate check for these payments since it’s all rolled into your mortgage payment.
All this aside, it’s important for FHA home loan applicants to know that there is no requirement in FHA guidelines to use an escrow account. Your lender may require an escrow account, but the FHA does not.
Under the Real Estate Settlement Procedures Act, if your lender requires you to use an escrow account as part of an FHA loan, the bank must issue you an initial and annual escrow account statement. This rule is designed to help borrowers know exactly how much money is going into escrow out of the FHA mortgage payment and what that money is being used for.
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: