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Do FHA Loans Require an Escrow Deposit?

Updated on May 21, 2011

The Federal Housing Authority insures mortgage loans for creditworthy buyers. FHA insurance makes loans less risky for lenders because the insurance covers a lender's loss if the buyer fails to repay the loan. This reduced risk encourages lenders to make more loans, and to make loans to buyers whose incomes or credit scores disqualify them for tougher-to-get conventional mortgage loans.

Escrow Deposit

An escrow deposit is earnest money a buyer gives a seller as soon as the seller accepts the buyer's offer. The deposit demonstrates the "earnestness" of the buyer's intention to go through with the sale. The FHA doesn't require an escrow deposit; however, a seller usually does, as earnest money is a disincentive for a buyer to back out of the sale. The higher the earnest money deposit, the more the buyer forfeits if he breaches the sales contract and so the less likely he is to breach.

Down Payment Requirements

The FHA requires a buyer to make a down payment on the property she's purchasing. The instant equity the down payment creates helps to safeguard the FHA's investment in the property from fluctuating property values. The down payment also demonstrates that the buyer can afford to purchase the home. In most cases, the down payment must equal at least 3.5 percent of the purchase price. However, a buyer with a low credit score may need to put down as much as 10 percent. The earnest money deposit is subtracted from the amount the buyer must pay down. The balance of the down payment is due at closing.

Miscellaneous Loan and Closing Costs

One of the benefits of an FHA-insured loan is that it allows the buyer to finance his closing costs. The seller must give her permission, as these financed costs reduce the seller's net proceeds from the sale. Among the costs the buyer may finance are the FHA mortgage insurance upfront premium and transfer and property taxes.

Close Your Loan Successfully

A buyer who purchases a home with an FHA loan must submit a lot of documentation showing his creditworthiness and the home's suitability as an investment. The buyer proves his creditworthiness by cooperating with the lender's request for verification of his income, assets and debts. He proves the home's suitability by hiring licensed professionals to certify that the home's structure and systems are in good repair. The more compliant the buyer is, and the faster he is to comply, the more likely he is to close in a timely fashion.


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