Escrow Rules for Second Home Loans
Escrow accounts are quite common on home mortgages. These accounts house mortgage customer's payments earmarked for property taxes and homeowner insurance premiums. The lender uses the escrowed funds to pay the tax and insurance bills on behalf of the borrower. Many lenders offer this service as a convenience, while others mandate the service. Second homes, in general, are more risky for lenders. Lenders may require strict escrow rules in such cases.
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Federal Housing Administration
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The Federal Housing Administration (FHA) is the federal government's lending arm of the Housing and Urban Development Administration. The FHA makes mortgages to customers who have credit scores above 620 (credit scores are three-digit numbers between 300 and 720; the higher the score, the better the credit). All FHA loans--even those for second homes--require escrow accounts. In addition, second home mortgages must not exceed an 80 percent loan-to-value ratio (LTV). To calculate LTV, mortgage lenders divide the mortgage balance by the home value and multiply by 100. If the loan is more than 80 percent of the property's value, the FHA cannot issue a mortgage and escrow cannot start.
Loan to Value
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All mortgage companies--not just FHA lenders--have a vested interest in the homes they finance. Keeping the property's taxes and insurance up-to-date is in the lender's best interest. If taxes or insurance lapse on the home, the mortgage is put in jeopardy. Mortgages with high LTVs are even more risky. Therefore, most mortgage lenders require escrow accounts on all mortgages whose LTV exceeds 80 percent. On second homes, the LTV restriction may be as low as 65 percent.
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Second Homes in FEMA Zones
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If a borrower purchases a second home (or vacation home) in a FEMA-designated area, lenders almost always require escrow. FEMA, or the Federal Emergency Management Agency, designates some areas as prone to emergencies. These areas include: the midwest flood zones, the Gulf Coast (hurricanes) and some areas in southern California (earthquakes). If a customer chooses a second home in a FEMA zone, he will likely pay more for insurance and must escrow that premium through his lender.
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References
- Photo Credit Beach houses on the New Jersey shore image by Richard McGuirk from Fotolia.com
