Escrow Accounts for FHA EEM Loans
The rules of escrow are established by the Real Estate Settlement Procedures Act or RESPA. Here's a sample of the FHA frequently asked questions list on the topic:
"Does RESPA require borrowers to maintain an escrow account?"
The FHA replies, no, RESPA does NOT require borrowers to maintain escrow. According to the FAQ:
"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."
While that rule applies in general, borrowers should know there ARE situations where an escrow account may be a requirement for some types of FHA loans.
Which type of loan requires escrow according to the FHA?
According to a reading of HUD 4155.1 Chapter Six, Section D, "General Information on the EEM Program" the rules for the FHA Energy Efficient Mortgage Loan, include the following:
"Under the EEM Program, a borrower can finance 100% of the cost of eligible energy efficient improvements into the mortgage, subject to certain dollar limitations, without an appraisal of the energy efficient improvements. For the EEM Program, the
- mortgage amount includes the cost of the energy efficient improvements, in addition to the usual mortgage amount normally permitted
- FHA maximum loan limit for the area may be exceeded by the cost of the energy efficient improvements
- energy efficient improvements must be cost effective in order to be included into the mortgage, and
- amount of the cost effective energy package is added to the approved base loan amount before adding any upfront mortgage insurance premium (UFMIP).
"FHA will endorse a mortgage for an existing property before the energy- efficient improvements are installed, provided that the lender establishes an escrow account and deposits funds into the account to pay for the energy- efficient improvements. The escrow account must be established for no more than 90 days, or 180 days for a Section 203(k) rehabilitation mortgage."
FHA rules add that when the improvements are not completed within 90 days, (or 180 days for a 203(k) mortgage) the lender is required to apply the money in escrow "to a prepayment of the mortgage principal. For new construction, there is no escrow account necessary, since the energy package is installed as part of the total construction, which must be completed prior to closing. The energy package must be completed before the mortgage is eligible for insurance, if using an FHA Construction-Permanent mortgage."
Again, these are rules for a very specific set of circumstances regarding VA EEMs. In general a new purchase loan does NOT require escrow under FHA loan rules, but borrowers should be aware that the lender is free to require an escrow account regardless. For more information on these requirements, contact the FHA directly at 1-800-CALL FHA.
Do you know what's on your credit report?
Learn what your score means.