FHA Loans and Escrow Accounts
In spite of what some may believe–or pass along as fact–the Real Estate Settlement Procedures Act does NOT required borrowers to maintain an escrow account in order to pay property taxes or other loan-related items. The use of an escrow account is solely the lender’s decision and is not forced upon the lender by RESPA. There are regulations that govern how much the lender can require in an escrow account.
In the same way, RESPA does not require lenders to run escrow accounts with a “cushion”. According to the FHA, “The RESPA statute and regulations do not require the lender to maintain a cushion. However, 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.”
The FHA also adds, “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.”
Why does the FHA warn about these issues? One quote from the FHA publication, FAQs About Escrow Accounts for Consumers is especially telling;
“The regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.”
Borrowers have the right to be fully informed about their FHA home loans. That includes knowing when a requirement such as escrow is imposed on the lender by Federal law, and therefore going to be present in any transaction regardless of which lender is used, and when a requirement is a choice made by a particular lender. Borrowers who know the difference can shop more competitively between lenders and get the best loan possible.
When the FHA and HUD switched over to the new FHA Single Family Home Loan policy handbook (HUD 4000.1), it restated some policies, redefined others, and made additions where needed.
One area some borrowers need information on is escrow accounts. FHA loan regulations address the use of escrow, but do not require it. Your lender might, and is free to do so under the FHA Single Family Home loan program, so it’s good to know the rules.
The first thing HUD 4000.1 does is to define the term “escrow”:
“An Escrow Account is a set of funds collected by the Mortgagee for payment of taxes, insurance, and other items required by the mortgage Note.”
Next there’s a definition of the FHA standard for escrow:
“The Mortgagee must segregate escrow funds, including those funds escrowed at
closing, and deposit the funds in a special custodial account characterized by the
–with a financial institution whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA);
–that does not limit the Mortgagees access to funds, require an advance notice of withdrawal, or require the payment of a withdrawal penalty; and
–that clearly identifies the type of funds being held in that account.”
Furthermore, lenders who use a “trust clearing account” are required to, “withdraw the portion that is to be applied to escrows within 48 hours of the deposit and must transfer the portion to the escrow account for the Borrower’s Mortgage.”
Mortgagees are not prohibited from holding escrow funds for all types of Mortgages in a single bank account; however, the Mortgagee must not commingle escrow funds, even temporarily, with funds used for the Mortgagees general operating purposes.”
Does the FHA require the lender to pay interest on the funds deposited in the escrow account?
According to HUD 4000.1:
“HUD regulations neither forbid nor require that escrow accounts earn interest. However, if escrow funds are invested, the Mortgagee 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.”
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is a free widget designed especially for real estate websites widget that displays FHA loan limits for the counties serviced by those sites.
It’s very 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:
Things That Can Affect Your Mortgage Interest Rate
May 4, 2019 – If you are thinking about buying a home and want to apply for a mortgage loan to purchase your first home, there are some variables that can affect the interest rate you are offered when you are ready to commit to purchasing the real estate.
FHA Home Loan Interest Rates: Shop Around
In recent years, government studies have shown that fewer than half of all American consumers shop around for mortgage rates. If you don’t shop around, you won’t get more competitive interest rates.
FHA Home Loan Interest Rates: Check Your Credit Scores
Interest rates advertised online and elsewhere don’t reflect the lender’s decisions to offer a higher or lower rate to a potential borrower based on credit scores. Your FICO scores will definitely affect the rate you are offered so it’s best to work on your payment history, lower your debt-to-income ratio, and take other steps to improve your credit before applying for a mortgage.
Market activity, breaking news, global headlines (especially economic headlines) and investor behavior can all influence the rates moving up or down. These things do not CONTROL mortgage loan interest rates, but they do INFLUENCE them. The rates you see online today might not be the rates you get offered tomorrow.
Borrowers may, depending on the nature of the transaction and other factors, have the option to buy down interest rates up front, saving money over the lifetime of the mortgage loan. Borrowers who have a goal of saving more up front and avoiding out-of-pocket expenses may choose not to pay discount points, but paying down an interest rate is one way you can affect the rate you are offered.
The type of mortgage loan you choose can also affect the interest rate you are offered; borrowers who choose an adjustable rate mortgage loan may be offered a lower introductory interest rate as an incentive to try an Adjustable Rate Mortgage loan to buy real estate. You can refinance later into a fixed-rate mortgage and avoid rate changes, but it is best to decide upon a strategy for your mortgage long-term if you want to do this.
Never apply for an adjustable rate mortgage without a plan to manage or avoid the future rate adjustments; know what to expect and how you will deal with such loans up front for best results.