Finance
Under RESPA (Real Estate Settlement Procedures Act), a lender may require the borrower to establish an escrow account for:
AHomeowners association dues and utility bills
BProperty taxes and hazard insurance✓ Correct
CMortgage insurance only
DAll future maintenance costs
Explanation
RESPA allows lenders to require escrow (impound) accounts for property taxes and hazard (homeowners) insurance. The lender collects a portion of these costs monthly to ensure funds are available when the annual bills come due.
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Key Terms to Know
Escrow
A neutral third-party arrangement where funds, documents, and instructions are held until all conditions of a real estate transaction are satisfied.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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