Escrow Accounts

Lenders providing an FHA-guaranteed loan must include real estate taxes, insurance, and other necessary payments in your monthly payment. A portion of the monthly payment is calculated to go towards these expenses, and is withheld by the lender to pay for these expenses. This amount is put into an escrow account. Although use of an escrow account is not required by law, it is standard practice, and its use is governed by the Real Estate Settlement Protection Act (RESPA).

Your monthly payment will include money for the FHA mortgage insurance premium, taxes, and property insurance. Since taxes and property insurance are usually due on an annual or semi-annual basis, the moneys needs to cover those costs are held in an escrow account and utilized when payments become due.

Under RESPA, lenders are limited in the amount of money they may require borrowers to set aside in escrow. RESPA does not require lenders to maintain a cushion, but lenders are allowed to do so, up to a cushion of about two months’ worth of escrow payments, or one-sixth of the total to be paid out of the account.

This is a maximum, lenders are not required by the FHA to have a two month cushion, and may opt to have a lower cushion if they desire. Nonetheless, most lenders set their escrow cushion to the maximum allowable level. Some states may mandate a lower cushion amount, and if so, the state law will prevail.

Borrowers usually do not receive interest on funds held in escrow, although a few states do require it. Lenders are required to make necessary payments out of your escrow account on a timely basis, and are responsible for any penalties that accrue for not making regularly scheduled payments.