Escrow Account Basics
Mortgage escrow accounts are special accounts set up in
which money is held to pay for property taxes, fire and
hazard insurance premiums, mortgage insurance premiums, and
other escrow items. Escrow accounts ensure that these items
are paid in a timely fashion. They are a guarantee that
there is always enough money to pay these bills when they
are due so that the homeowner avoids the risk of lapsed
insurance coverage or delinquent taxes.
Guarantee that bills are paid on time.
Homeowners do not have to worry about coming up with several
large, lump sum payments, each with different due dates,
throughout the year.
Unexpected increases are taken care of.
It is the responsibility of the mortgage company to allow
for possible increases in tax or insurance premiums.
Mortgage companies typically cover shortages when tax or
insurance payments increase.
It is very common for mortgage companies to pay taxes and
insurance premiums when they are due even though all the
money for these bills has not yet been collected from the
homeowner.
Mortgages have lower rates and downpayments because of
escrows.
Escrows protect the interest of investors of home mortgage
loans by making them more attractive and secure as
investments.
Local governments save money.
Escrow accounts also benefit local governments by providing
a more efficient, less expensive means of tax collection.
Real Estate Settlement
Procedures Act
This law protects consumers from abuses during the
residential real estate purchase and loan process and
enables them to be better informed shoppers by requiring
disclosure of costs of settlement services.
The U.S. Department of Housing and Urban Development’s (HUD)
Federal Housing Administration (FHA) administers several
regulatory programs to ensure equity and efficiency in the
sale of housing. One of these programs, under the Real
Estate Settlement Procedures Act (RESPA), applies to almost
all mortgage loans and mortgage companies, not just
FHA-insured mortgages. RESPA’s purposes are (1) to help
consumers get fair settlement services by requiring that key
service costs be disclosed in advance, (2) to protect
consumers by eliminating kickbacks and referral fees that
would unnecessarily increase the costs of settlement
services, and (3) to further protect consumers by
prohibiting certain practices that increase the cost of
settlement services.
RESPA protects consumers by mandating a series of
disclosures that prevent unethical practices by mortgage
companies and that provide consumers with the information to
choose the real estate settlement services most suited to
their needs. The disclosures must take place at various
times throughout the settlement process:
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Disclosures at the time of loan application. When a
potential homebuyer applies for a mortgage loan, the buyer
must receive (1) a Special Information Booklet, which
contains consumer information on various real estate
settlement services; (2) a Good Faith Estimate of
settlement costs, which lists the charges the buyer is
likely to pay at settlement and states whether the buyer
is required to use a particular settlement service; and
(3) a Mortgage Servicing Disclosure Statement, which tells
the buyer whether the loan will be kept or transferred for
servicing, and also gives information about how the buyer
can resolve complaints. RESPA does not specify penalties
when these three items are not provided, but bank
regulators can impose penalties.
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Disclosures before settlement (closing) occurs. (1) An
Affiliated Business Arrangement Disclosure is required
whenever a settlement service refers a buyer to a firm
with which the service has any kind of business
connection, such as common ownership. The service usually
cannot require the buyer to use a connected firm. (2) A
preliminary copy of a HUD-1 Settlement Statement is
required if the borrower requests it 24 hours before
closing. This form gives estimates of all settlement
charges that will need to be paid, both by buyer and
seller.
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Disclosures at settlement. (1) The HUD-1 Settlement
Statement is required to show the actual charges at
settlement. (2) An Initial Escrow Statement is required at
closing or within 45 days of closing. This itemizes the
estimated taxes, insurance premiums, and other charges
that will need to be paid from the escrow account during
the first year of the loan.
-
Disclosures after settlement. (1) An Annual Escrow Loan
Statement must be delivered by the servicer to the
borrower. This statement summarizes all escrow account
deposits and payments during the past year. It also
notifies the borrower of any shortages or surpluses in the
account and tells the borrower how these can be paid or
refunded. (2) A Servicing Transfer Statement is required
if the servicer transfers the servicing rights for a loan
to another servicer.
Along with these disclosures, RESPA protects consumers by
prohibiting several other practices: (1) Kickbacks,
fee-splitting, and unearned fees: Anyone is prohibited from
giving or accepting a fee, kickback, or any thing of value
in exchange for referrals of settlement service business
involving a federally related mortgage loan, which covers
almost every loan made for residential property. RESPA also
prohibits fee-splitting and receiving unearned fees for
services not actually performed. Violations of these RESPA
provisions can be punished with criminal and civil
penalties. (2) Seller-required title insurance: A seller is
prohibited from requiring a homebuyer to use a particular
title insurance company. A buyer can sue a seller who
violates this provision. (3) Limits on escrow accounts: A
limit is set on the amount that a borrower is required to
put into an escrow account to pay taxes, hazard insurance,
and other property charges. RESPA does not require an escrow
account on borrowers, but some government loan programs or
mortgage companies may require an escrow account. During the
course of the loan, RESPA prohibits charging excessive
amounts for the escrow account. And each year, the borrower
must be notified of any escrow account shortage and return
any excess of $50 or more.
Two Key Factors in Qualifying
for a Home Loan
In attempting to approve home buyers for the type and amount
of mortgage they want, mortgage companies basically look at
two key factors: the borrower's ability and willingness to
repay the loan. Ability to repay the mortgage is verified by
your current employment and total income. Generally
speaking, mortgage companies prefer for you to have been
employed at the same place for at least two years, or at
least be in the same line of work for a few years.
The borrower's willingness to repay is determined by
examining how the property will be used. For instance, will
you be living there or just renting it out? Willingness is
also closely related to how you have fulfilled previous
financial commitments, thus the emphasis on the credit
report or rent and utility bills.
It is important to remember that there are no rules carved
in stone. Each applicant is handled on a case-by-case basis.
So even if you come up a little short in one area, perhaps
one of your stronger points will make up for the weak one.
Everyone involved in real estate is in the business of
selling homes, in one way or another. Therefore, if the loan
makes sense, mortgage companies and insurers will do their
best to see that you qualify.
By its very nature, mortgage insurance is an aid to
affordability, because it allows families to purchase homes
with less cash on hand. The industry plays a central role in
helping low- and moderate-income families become homeowners.
More and more borrowers are taking advantage of low down
payment mortgages and becoming homeowners with as little as
5 percent down. For more information on how you can take
advantage of the benefits of a low down payment home loan
with mortgage insurance, contact us or
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