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If you need an FHA home loan an escrow account will be an important part of your home loan experience. These accounts are used to store money from your monthly mortgage payments that is set aside for property taxes, insurance, and other expenses.

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FHA Home Loan Basics: Why You May Need an Escrow Account

November 17, 2020

FHA Home Loan Basics: Why You May Need an Escrow Account

If you need an FHA home loan, especially for those pursuing FHA 203(k) rehab loans or FHA One-Time Close construction loans, an escrow account will be an important part of your home loan experience. These accounts are used to store money from your monthly mortgage payments that is set aside for property taxes, insurance, and other expenses.

Without an escrow account the borrower is personally responsible for making sure property taxes, insurance, and the other expenses are paid on time, which can get complicated depending on circumstances.

What Is Escrow?

Escrow is a tool you can use to simplify your home loan payment issues with respect to property taxes, homeowner insurance, and other payments; you can use it as an option where the option exists, but your lender may require the use of escrow and there may even be a legal requirement for escrow. Much will depend on the state you’re buying in and the circumstances of your loan.

What’s involved in the escrow process? Your monthly mortgage payment consists of your principal balance, interest, plus mortgage insurance, property taxes, and any other required expense that counts as part of your monthly mortgage payment. 

Not all of this money goes into escrow; your lender accepts your payment on the principal and interest (plus any other fees that might be due the lender in your monthly payment). The money for property taxes and other expenses (insurance, etc.) go into escrow.

This process and its details won’t be a mystery. It should be included in your legally binding purchase agreement.

Why Escrow Is Important

Why is escrow so important and actually required by the lender where applicable? Because payment of property taxes is a high-stakes proposition. You can lose your home if you fail to pay property taxes, your home owner’s association dues, etc.

The amount of such taxes and dues may be subject to change from year to year and you may find your monthly payment fluctuates as a result. Borrowers who see changes on their mortgage payments they don’t understand should contact the loan servicer immediately but know that in some cases higher property taxes could be the reason.

What happens if you don’t use an escrow account and you miss your required payments? The lender has the legal right to:
 
  • Add the amounts to your loan balance
  • Add an escrow account to your loan
  • Purchase new homeowners insurance for you and bill you for it. Known as force-placed insurance, this can be more costly than the homeowners insurance you would pay for otherwise.

These expenses must be paid regardless; borrowers find escrow a way to mitigate getting hit by a large lump sum payment once a year, making the smaller monthly payments on them softens the economic impact of property tax payments and other costs.

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