The FHA Escrow Mortgage

As a loan officer, I have found that very few people – including real estate agents and other loan officers – have ever heard of an FHA Escrow mortgage and how it can sometimes salvage a home sale. So the purpose of this article is to explain what an FHA Escrow mortgage is and when it can be used effectively.

Whenever you apply for a mortgage, the lender will order an appraisal. The primary purpose of the appraisal is to determine the value of the home at today’s market prices. However, with a traditional FHA mortgage, the lender is also concerned about the condition of the home. Any major issues written up by the appraiser such as damaged siding, missing roof shingles, cracked plaster, peeling paint, etc. must be fixed before the loan can close. If the seller is unable or unwilling to make the needed repairs, the buyer can consider using an FHA Escrow loan.

With an FHA Escrow mortgage, a licensed contractor will look at the property and prepare a quote for the work required for the property to be FHA eligible. The lender will hold in escrow 1.5 times the bid amount. Once the loan has closed, the buyer will have a certain amount of time to have the repairs done – as the work is done, the lender will release the escrowed funds to the contractor or contractors directly. Once the work has been completed, the appraiser will confirm that the work has been done. Any excess escrow will then be returned to the buyer.  There is a $5,000 limit to the amount that can be escrowed.

 Case Study: I have recently been working with a buyer who has made an offer on a home built in the 1800’s. This home is an estate sale and a bank is the estate agent. It has been unoccupied for some time. This has resulted in a number of problems including extensive interior peeling paint, water leakage around the window frames on the front of the house which has resulted in badly cracked plaster beneath the windows and other similar non-structural issues. Since this is an estate sale, the bank will not do any repairs. In its present condition, this home does not qualify for a traditional FHA mortgage. In fact, it would not qualify for a conventional, USDA or VA mortgage either. We had a contractor come in and give us a quote to cure the issues raised in the appraisal. The quote was under $5000.00 so this property does qualify for an FHA Escrow loan. The only other option would have been a 203K rehabilitation mortgage; however, that is a lengthy and somewhat arduous process and this buyer did not want use that option.

In summary, the FHA Escrow mortgage is a little known option that can sometimes be used to obtain a mortgage when other mortgage types simply will not work.

Submitted by: Dale Athanas, Northeast Financial Mortgage, 860-876-0466