HB-1-3550

7-1

7.1 INTRODUCTION

Besides loan payments, other costs associated with being a homeowner include real estate 

taxes, hazard and flood insurance premiums, and related costs such as street or water 

assessments. The Agency has an interest in making sure that these costs are paid in order to 

protect the property from tax sale or foreclosure, and to make sure that funds will be available to 

repair the property should it be damaged.

SECTION 1: ESCROW [7 CFR 3550.60]

7.2 OVERVIEW

To ensure that funds are available to pay for the cost of real estate taxes, insurance 

premiums, and other assessments when they come due, the Agency requires borrowers who 

receive new loans -- whether initial or subsequent -- to deposit monthly funds to an escrow 

account in order to be used to pay the borrower’s tax and insurance bills. These funds are 

included in the borrower’s regular monthly payment. An escrow account must be established at 

loan closing for all loans with a total outstanding indebtedness greater than $15,000 (be it 502, 

504, or combination thereof) except new construction. This is because loan payments are not due 

during construction. Since the exact amount of taxes, insurance premiums and assessments are 

not known in advance, a cushion is established at closing to help ensure that there will be 

sufficient funds available to pay the bills. If the Agency underestimates the amount needed, the 

Agency will advance funds to pay the tax or insurance bill and raise the borrower's escrow 

payments during the following year to repay the amount advanced. If the Agency overestimates 

the funds needed, a refund may be issued if the amount is greater than $50. If the amount of 

overage is less than $50, it will be credited to the next year’s escrow. Annual-pay borrowers are 

exempt from the escrow requirement but are responsible for timely payment of taxes and 

insurance premiums. The Agency will not escrow where the security property is located on a 

farm tract also financed by the Farm Service Agency (FSA), and we are unable to obtain a 

separate tax bill. FSA will be responsible for paying taxes in these situations. The only exception 

to this is for a Section 504 loan over $15,000 on a farm tract (see Paragraph 12.10).

CHAPTER 7: ESCROW, TAXES, AND INSURANCE

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

7-2

Paragraph 7.2 Overview

The Agency will establish and administer escrow accounts in accordance with the 

Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act and the 

Truth In Lending Act (TRID) and section 501(e) of the Housing Act of 1949, as amended.

The Agency requires most borrowers who receive new loans to escrow funds for taxes 

and insurance. Borrowers are exempt from escrow if they:

• Are current on an annual payment plan;

• Have a leveraged loan and the escrow is maintained by the primary lending 

institution;

• Have received only a Section 504grant;

• Have a Section 504 loan(s) with a total outstanding balance of $15,000 or less, and 

the Agency determines there is no risk to the Government’s security interest in the 

property;

• Assumed a loan on same rates and terms; or

• Have security property which includes a farm and the property is not subdivided 

between the farm and non-farm tract. In these cases, the Agency may still elect to 

require escrow where the housing represents the majority of the value of the security 

property or it is in the Agency’s best interest to require escrow.

The Servicing and Asset Management Office (Servicing Office) is responsible for 

administering the escrow account. However, the Loan Originator is responsible for determining 

the monthly escrow deposit contribution during the first year, ensuring that the appropriate 

amount is collected at closing to establish the escrow account and to educate the borrower about 

what escrow accounts are and how they work.

7.3 ESCROW DEPOSITS

Escrow accounts are funded from 3 sources -- monthly payments, an initial deposit 

required at closing, and funds from the seller to cover taxes accrued prior to closing. Exhibit 7-1 

illustrates the calculation of the initial deposit and monthly escrow payments.
HB-1-3550

7-3

Paragraph 7.3 Escrow Deposits

A. Monthly Payment

The borrower's monthly installment includes not only the amount due for principal and 

interest, but also 1/12 of the anticipated amount required for taxes, insurance, other assessments 

for the year, plus a cushion as authorized by TRID.

B. Borrower’s Initial Deposit to the Escrow Account

Over the course of a year the borrower's monthly payments should provide the amount 

needed to pay all tax, insurance (including flood insurance as applicable), and other assessment 

bills. However, the timing of the payments may be such that a bill comes due before the 

borrower has made sufficient payments to cover the cost. To avoid this problem, the borrower is 

required to make an initial deposit to the escrow account that is large enough to ensure that all 

anticipated payments can be met when they come due, but that at its low point the account 

contains no more than the equivalent of 2 monthly escrow payments.

C. Seller’s Tax Liability

Taxes must be prorated between the buyer and the seller. To ensure that funds from the 

seller’s pro rata share of the taxes are available to pay the taxes when they come due, funds are 

collected at closing to pay the borrower’s closing costs or initial escrow deposit. Prorated tax 

funds may not be paid to the applicant/borrower other than for reimbursement of certain items 

paid by the applicant outside of closing. See Paragraph 8.6 F for additional guidance.

7.4 CALCULATING ESCROWAMOUNTS

The Loan Originator must provide UniFi with tax and insurance figures that are then used 

to estimate the maximum loan amount, to determine the amount of loan funds to obligate, and to 

establish monthly payments and the initial deposit to the escrow account.

Although tax and insurance information used early in the process will be based on rough 

estimates, the Loan Originator should make every effort to obtain accurate information about 

historic and future costs so that later entries will be as accurate as possible. For construction 

loans, when calculating the escrow payment for closing, the Field Office is to use the amount 

needed to cover the real estate taxes for the upcoming 12 months. The Loan Originator must 

consider that there may be a re-assessment of the real estate taxes upon the completion of the 

dwelling and the escrow calculations will be made accordingly.

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN
HB-1-3550

7-4

Paragraph 7.4 Calculating Escrow Amounts

Exhibit 7-1 

Escrow Account Funding

The initial escrow balance and the escrow payment amount are calculated in accordance with TRID and any other 

associated regulation. UniFi prepares Form RD 3550-9, Initial Escrow Account Disclosure Statement, described in 

Paragraph 7.5. The following example is intended to show how escrow accounts are funded each year.

Assumptions:

(1) The loan closing occurs on April 12, 2020 with the first payment due May 12, 2020

(2) Taxes of $753 are paid in July andDecember

(3) Hazard insurance of $1,228.00 is paid inMarch

(4) The Agency requires a minimum balance equal to 2 months of payments

Monthly Payment Calculation:

$ 753.00

$ 753.00

$1,228.00

$2,734.00 Total anticipated escrow disbursements divided by 12 equals

$ 227.83 per month escrow payment

Month Payments to Escrow Disbursements Balance

Loan Closing $683.53 $ 0.00

$ 0.00

$ 0.00

$ 753.00

$ 0.00

$ 0.00

$ 0.00

$ 0.00

$ 753.00

$ 0.00

$ 0.00

$1,228.00

$ 0.00

$ 683.53

$ 911.36

$1,139.19

$ 614.02

$ 841.85

$1,069.68

$1,297.51

$1,525.34

$1,000.17

$1,228.00

$1,455.83

$ 455.66

$ 683.49

The borrower will be required to pay $227.83 per month and will also be required to fund the escrow account 

at closing in the amount of $683.53. Part of the tax payment component of the initial escrow deposit will be 

contributed by the seller for the period from January 1st to the closing on April 12th.

According to TRID, the lending institution may at some time during the year achieve an escrow balance that does 

not exceed 2 monthly escrow payments. In this example the balance equal to 2 monthly payments ($455.66), occurs 

in March after the payment for hazard insurance.

The Servicing Office is required to perform an escrow analysis within 12 months of the first payment and every 

year thereafter. The actual running escrow balance from the prior year will become the basis for projecting the 

necessary escrow payment for the next year. The low point achieved will be compared to the projected minimum of

$455.66. If the low point is below $455.66, the loan will be deemed to have a shortage. If the low point is greater 

than $50, the loan will have a surplus, which will be refunded to the borrower. If the surplus is less than $50, the 

amount will be credited to the next year’s escrow.

May $227.83

June $227.83

July $227.83

August $227.83

September $227.83

October $227.83

November $227.83

December $227.83

January $227.83

February $227.83

March $227.83

April $227.83
HB-1-3550

7-5

7.5 CLOSING

The Closing Agent/Attorney will use the Closing Disclosure to prorate real estate taxes 

for the current year between the seller and the buyer.

Form RD 3550-9, Initial Escrow Account Disclosure Statement, will be completed by 

the Loan Originator and sent to the Closing Agent/Attorney at loan closing.

The Closing Agent/Attorney will collect the escrow funds at closing, and in most cases 

will provide them to the Servicing Office along with the closing documents. If real estate taxes 

are due within 60 days of the date of closing, the Closing Agent/Attorney should pay the real 

estate taxes and provide the remaining amount to the Servicing Office.

7.6 CONSTRUCTION LOANS

During the construction period, borrowers must be counseled that they are responsible for 

payment of taxes which come due since loan payments are not due during the construction 

period. The borrower is also responsible for the initial escrow deposit when construction is 

complete. Field Staff should complete Attachment 7-A to determine the borrower’s full tax and 

insurance needs during the construction period. Funds for the payment of taxes during 

construction, and for the initial escrow deposit which includes both taxes and insurance, can be 

handled by one of the following two methods.

• One method would be to include any taxes that must be paid during construction and 

the initial escrow deposit in the loan amount. This option is at the discretion of the 

applicant, and is subject to loan underwriting standards. If this option is used, the 

applicant must be counseled that they are responsible for delivering the tax bill to the 

Field Staff so a loan check can be requested to pay the taxes. The applicant is 

responsible to follow-up with Field Staff, or the taxing authority, to ensure their tax

payments were paid on time. If the initial escrow deposit was included in the loan, 

the applicant must also be counseled that they are responsible for funding any 

shortages. This may occur if the construction is delayed.

• The other method would be for the applicant to pay any taxes which come due during 

construction with personal funds while saving funds to make the initial escrow 

deposit at the end of the construction period. Should an applicant choose this option, 

they must be counseled to pay the tax bills when due and provide a copy to the Field 

Office. The applicant must also be counseled on how much will be required at the 

end of the construction period to adequately fund the initial escrow deposit.

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

7-6

Paragraph 7.6 Construction Loans

Insurance is paid for one year in advance by loan closing. Therefore, an insurance bill 

should not come due during the construction period. If a bill does come due during construction, 

the borrower is responsible to pay the full annual premium. If the borrower does not pay tax 

bills or insurance bills which become due during construction, or there are insufficient funds to 

establish the escrow account when the loan is converted, the Field Office will cue the Servicing 

Office and provide the estimated amount of shortage, and the facts in the case. The Servicing 

Office will generally increase the monthly payments scheduled for the remainder of the escrow 

cycle to compensate for any shortage. The Servicing Office may also elect to charge the 

borrower’s account for the shortage and reamortize the loan.

7.7 SERVICING ESCROWACCOUNTS

The Servicing Office will handle ongoing actions related to escrow accounts, including 

collecting monthly payments, depositing funds into the escrow account, and handling all tax and 

insurance payments. The Servicing Office will conduct the annual escrow account analysis and 

send annual escrow disclosure statements to borrowers to give an escrow account history for the 

past year, including any differences between what was estimated and what was actually 

disbursed.
HB-1-3550

7-7

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

SECTION 2: TAXES

7.8 ESTIMATING THE AMOUNT OFTAXES

The Loan Originator can gather tax information from several sources. For existing 

properties, the Loan Originator can contact the real estate agent, the seller, and/or the local taxing 

authority to determine current taxes and whether any reassessment or tax rate increase is 

anticipated.

It will be more difficult for the Loan Originator to estimate taxes when dealing with 

planned new construction or a newly constructed property that has not yet been assessed. To 

make this estimate, the Loan Originator will use comparable existing residential property values 

in the market area for the first year, in order to prevent significant increases in the second year 

escrow payment as a result of the increase in property value to make this estimate. Any prorated 

amount of taxes to be paid by the seller should be based on the current assessment, even if it is 

not recent and does not reflect the actual value of the house.

7.9 TAX SERVICE FEE

Each new borrower will be charged a one-time tax service fee at the time of loan closing. 

The fee covers the cost of a tax monitoring service to track tax payments due, determine the most 

advantageous time to pay them, and arrange for payment of the taxes to be disbursed from the 

borrower’s escrow account. State Directors are responsible for determining the tax exempt status 

of Native American reservation, tribal, and trust land and notifying those Field Offices which are 

affected. If the land is tax exempt, meaning no real estate taxes are assessed or charged, then a 

tax service fee will not be collected. Individual plots that are typically owned in fee simple are 

generally subject to taxation and a tax service fee will be collected. Borrowers who are

obtaining a subsequent loan will not pay a second tax service fee. Refer to the tax service fee 

schedule shown in Attachment 7-B to determine the fee charged for new loans and new rates and 

terms assumptions.

7.10 TAX INFORMATION SHEET

At closing, the Loan Approval Official or Designee will review, update, and return a 

copy of the completed Form RD 3550-15, Tax Information, to the Closing Agent/Attorney with 

other closing documents. Form RD 3550-15 should list all of the local taxing authorities to 

which taxes are due, the amounts, the due dates, the parcel identification number, and a legal 

description of the property. All of this information is needed to allow the Servicing Office to 

manage the escrow account effectively and to protect the borrower from a shortage in their 

escrow account.
SECTION 3: INSURANCE [7 CFR 3550.61]

7.11 OVERVIEW

The borrower is responsible for obtaining and continuously maintaining insurance on 

the security property until the loan is paid in full. The applicant will learn about the 

Agency’s requirements and borrower’s responsibilities regarding insurance during applicant 

orientation.

After the loan is closed, the Servicing Office is responsible for handling most insurance issues.

The Field Office is likely to become involved only if the Servicing Office requests 

assistance to determine whether adequate repairs have been made to a property for which 

an insurance claim has been paid.

7.12 TYPES OF INSURANCE

A. Hazard Insurance

Most borrowers are required to 

maintain hazard insurance to protect the 

property against fire and weatherrelated damage (these policies may also 

be called “Fire and Extended 

Coverage,” “Homeowner’s,” “All 

Physical Loss,” or “Broad Form” 

policies). Hazard insurance is not 

required if the total outstanding Agency 

debt and any senior liens against the 

property are equal to or less than

$15,000.

B. Flood Insurance

Flood insurance is required when any form of federal financial assistance which is intended 

in whole or in part for the acquisition, construction, reconstruction or substantial 

improvement of any building located in a Special Flood Hazard Area (SFHA), as identified 

by the National Flood Insurance Program (NFIP), administered by the Federal Emergency 

Management Agency (FEMA) and described in RD Instruction 426.2.

Substantial improvement means any reconstruction, rehabilitation, addition, or other 

improvement of a structure, the cost of which equals or exceeds 50 percent of the market 

value of the structure (a) before the start of construction of the improvement, or (b) if the 

structure has been damaged and is being restored, before the damage occurred.

7-8

Master Policies

A master policy is one containing substantially the same 

standard provisions adopted or recommended by legislative 

action or by order of the State’s insurance authority and 

ensures that the policy meets State requirements. The Loan 

Originator should require a master policy, unless State statutes 

exempt the company from the regulations requiring its use. In 

order for a company’s policy to be approved by the Agency, it 

must submit a copy of the master policy and all attachments to 

the State Office for review and approval.

In States without master policies, Field Staff will ensure that 

policies meet the requirements of Attachment 7-C.

Many State Directors issue State Supplements to help Field 

Staff identify acceptable insurance policies.
HB-1-3550

7-9

(01-23-03) SPECIAL PN

Revised (07-16-20) PN 538

Substantial Improvement Example:

$83,170 – market value prior to improvements

RD 504 loan funds: $10,500 

RD 504 grant funds: $7,500

Total costs of improvements: $18,000

$18,000 = .22 (22 percent)

$83,170

The total cost of improvements does not equal or exceed 50 percent of the market 

value prior to the start of improvements; therefore, flood insurance is not required.

Paragraph 7.12 Types of Insurance

1. How to determine substantial improvement.

When improvements to a building are proposed, the cost of the improvement must 

include all labor and materials necessary to perform the work. The market value of the 

structure is the market value before the improvements are performed.

2. How to determine the market value of a building.

The requirements outlined in Chapter 5 must be followed when determining if an 

appraisal of market value prepared by a qualified professional is needed.

If an appraisal is not required, there are three methods that can be used to estimate the 

market value for the substantial improvement threshold:

• Property assessment values determined by a local taxing authority. The assessor’s 

office should provide an adjustment factor that, when applied to assessed value, 

yields the “adjusted assessed value”.

• The actual cash value or replacement cost value, including depreciation for 

physical conditions.

• “Qualified estimates” based on the professional judgment of a local official.
7-10

HB-1-3550

Paragraph 7.12 Types of Insurance

3. Special Flood Hazard Area (SFHA)

FEMA’s Standard Flood Hazard Determination Form (SFHDF) determines if the home is 

located in a Special Flood Hazard Area (SFHA) and states the availability of flood 

insurance based on whether the community participates in the National Flood Insurance 

Program (NFIP).

The Loan Originator will be responsible for acquiring the SFHDF from CoreLogic Flood 

Services at: https://www.floodcert.com/.

Existing dwellings located in a SFHA are eligible for federal financial assistance if flood 

insurance is available for the community. The flood insurance can be through NFIP or 

under NFIP’s “write your own” program where the policy is through a private insurance 

that meets the requirements of 42 USC 4012a (b)(1)(A).

Flood insurance must be obtained and maintained throughout the life of the loan when any 

portion of a home is located in a SFHA, including attached garages, decks and carports, etc. 

Flood insurance is not required for any additional structure that is located on the property 

but is detached from the home (such as detached shed, garage, or other ancillary structure). 

Flood insurance is not required if the financial assistance is less than the substantial 

improvement threshold. If the financial assistance is to make minor repairs, the Agency 

must perform step 8 of the eight-step decision making process to evaluate the proposed 

impacts when providing federal funding to a property in a floodplain.

If the home is in a SFHA and flood insurance is required, the Loan Originator should notify 

the applicant using Form RD 3550-6, Notice of Special Flood Hazards, Flood Insurance 

Purchase Requirements, and Availability of Federal Disaster Relief Assistance; and obtain 

the FEMA Elevation Certificate. The applicant must sign and return Form RD 3550-6 at or 

before loan closing.

C. Builder’s Risk Policies

A builder’s risk policy is acceptable while the dwelling is under construction as long as it meets 

the Agency’s requirements. An acceptable policy either: (1) names the borrower as the insured; 

or (2) contains a builder’s risk endorsement for a policy issued to the borrower. A policy 

issued only to a contractor is not an acceptable substitute for the property insurance a borrower 

is required to provide. A builder’s risk policy should automatically convert to full coverage 

when the dwelling is completed. Otherwise, acceptable insurance must be obtained to coincide 

with the expiration of the builder’s risk provisions of the policy.
HB-1-3550

7-11

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

7.13 EVIDENCE OF INSURANCE

For loans secured by a first lien, the applicant must provide the original policy or 

declaration page, and evidence that 1 full year’s premium has been paid before or at the time 

of closing. For loans secured by other than a first lien, a copy of the policy or declaration 

page, or other evidence of insurance, is acceptable. The applicant may submit a written 

binder in lieu of the policy or declaration page, as long as the policy will be submitted to the 

Servicing Office within 60 days of closing. Existing borrowers already on escrow

submitting an application for a subsequent loan are not required to provide evidence of a full 

years paid premium.

7.14 AUTHORIZED INSURANCEPROVIDERS

Borrowers must purchase their policies from approved insurance companies licensed 

to do business in the State where the property is located. If the required insurance is not 

available at comparable rates from a State-licensed insurance company, the Loan Originator 

may accept insurance from another company if:

• The Office of General Counsel (OGC) confirms that policies issued by the 

company are enforceable despite the fact that the company is not licensed to 

conduct business in the State, and the company is a legal entity that may be sued 

in the State where the property is located; and

• The State Director determines that the company is reputable and financially sound, 

based on the company’s financial statements, industry rating standards, or 

information available from the State insurance authority, or other lending 

institutions.

7.15 REVIEWING INSURANCEPOLICIES

The borrower must submit evidence of insurance to the closing agent before or at the

time of closing. The closing agent will review the policy, declaration page, or binder to ensure 

that it meets the requirements outlined in Attachment 7-C. If it is acceptable, the evidence of 

coverage should be kept in the borrower’s case file after closing. If the borrower’s policy or 

evidence is insufficient, the closing agent should explain why it is not acceptable (for example, 

there is not an adequate amount of coverage, it is not in the correct name, or the premium has not 

been paid). The closing will be postponed until suitable evidence has been provided to the 

closing agent.
ATTACHMENT 7-A

HB-1-3550

Attachment 7-A 

Page 1 of 4

CALCULATION OF ESTIMATED TAXES DUE THROUGH CONSTRUCTION 

PERIOD AND INITIAL ESCROW DEPOSIT

Date Prepared:

Customer Name:

Loan Amount: $

County/Parish:

Loan Closing Date:

Number of Months in Annual Insurance

Construction Period: Premium Amount: $

Estimated Real Estate Annual Real Estate

Taxes (Lot Only): $ Taxes (As Improved): $

STEP 1

STEP 2

Estimate the taxes and insurance costs over the next 12 months:

Taxes $ divided by 12 = $ monthly 

Insurance $ divided by 12 = $ monthly

TOTAL Estimated Monthly Escrow $ (STEP 1)

Estimate the actual tax bills that will come due during the construction period.

STEP 3

Due: Due:

Due:

Amount $

Amount $

Amount $

Total Taxes Due During Construction $ (STEP 2)

STEP 4

Estimate the two month cushion by taking the monthly escrow calculated in STEP 1 and 

multiplying it by two.

Estimated Monthly Escrow (from STEP1) $ x 2 = $ (STEP 3)

Estimate the initial escrow deposit for property insurance by taking the annual premium, 

dividing by 12, and then multiplying the result by the number of months for construction.

Monthly Insurance $

STEP 5

x (# of months to construct) = $ (STEP 4)

STEP 6

STEP 7

Estimate the initial escrow deposit for taxes by taking the annual taxes due, dividing by 

12, multiplying the result by the number of months for construction, and then subtracting 

the amount estimated in STEP 2.

Monthly Taxes $ x (# of months to construct) = $

minus $ (result of STEP 2) = Total (enter “0” if negative) $ (STEP 5)

Estimate the borrower’s total financial needs for taxes and insurance by adding the results

of STEPS 2 through 5 = GRAND TOTAL$ (STEP 6)

NOTE: The “GRAND TOTAL” is the amount of taxes due during the construction period 

plus the initial escrow deposit.

Estimate the initial escrow deposit by adding the results of STEPS 3, 4, and 5 =

TOTAL ESTIMATED INITIALESCROW DEPOSIT $ (STEP 7)

For borrowers who so elect, and subject to loan underwriting requirements, the Grand Total (STEP 6) may be included in the 

loan amount. The taxes due in STEP 2 will be paid during the construction period from loan proceeds. The estimated initial 

escrow deposit will be forwarded to the Servicing Office when construction is complete, and the loan is converted to an active 

account. If STEP 6 is not included in the loan amount, the borrower must be counseled to save this amount during the 

construction period and pay taxes when due.

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

Attachment 7-A 

Page 2 of 4

CASE STUDY #1

Susan Smith has been selected to participate in the Self-Help housing program. She will be borrowing

$75,000. The construction period is estimated to be 11 months, and loan closing is May 1, 1998. Real 

estate taxes are paid twice a year - on June 30 and December 30. Taxes on the lot are $240 per year and 

are estimated to be $1,200 when the house is complete. The local county will reassess taxes on the 

completed house at an undetermined time after the Certificate of Occupancy is issued and the first full tax 

bill will be issued at the beginning of next full tax cycle. Annual insurance is estimated at $360.

See Page 3 of 4 for the results.

CASE STUDY #2

Tony Williams is a mason and owns his own lot. He obtained a building permit several months ago and 

has recently constructed a full foundation on his site. Mr. William’s loan for $55,000 was just approved 

and loan closing scheduled for July 1, 1998. The local county will reassess taxes each October, and taxes 

are due January 1 and July 1. The taxes are currently $360 per year on the site (including the foundation), 

and are estimated to be $1800 when the house is complete. Construction will take approximately 60 days. 

Since construction will be completed prior to October (tax assessment time) the January 1 tax bill will 

reflect the full tax assessment. Annual insurance is $600 per year.

See Page 4 of 4 for the results.
HB-1-3550

ATTACHMENT 7-A

Attachment 7-A 

Page 3 of 4

CALCULATION OF ESTIMATED TAXES DUE THROUGH CONSTRUCTION 

PERIOD AND INITIAL ESCROW DEPOSIT

Date Prepared : 4/1/98

Customer Name: Susan Smith County/Parish: Carolina

Loan Amount: $ 75,000 Loan Closing Date: 5/1/98

Number of Months in Annual Insurance

Construction Period: 11 Premium Amount: $ 360

Estimated Real Estate Annual Real Estate

Taxes (Lot Only): $ 240 Taxes (As Improved) $ 1,200

STEP 1

STEP 2

Estimate the taxes and insurance costs over the next 12 months: 

Taxes $ 240 divided by 12 = $ 20 monthly

Insurance $ 360 divided by 12 = $ 30 monthly

TOTAL Estimated Monthly Escrow $ 50 (STEP 1)

Estimate the actual tax bills that will come due during the construction period.

Due: 6/30/98 Amount $ 120

Due: 12/30/98 Amount $ 120 

Due: Amount $

STEP 3

Total Taxes Due During Construction $ 240 (STEP 2)

Estimate the two month cushion by taking the monthly escrow calculated in STEP 1 and 

multiplying it by two.

STEP 4

STEP 5

STEP 6

STEP 7

Estimated Monthly Escrow (from STEP 1) $50 x 2 = $ 100 (STEP 3)

Estimate the initial escrow deposit for property insurance by taking the annual premium, 

dividing by 12, and then multiplying the result by the number of months for construction .

Monthly Insurance $ 30 x 11 (# of months to construct) = $ 330 (STEP 4)

Estimate the initial escrow deposit for taxes by taking the annual taxes due, dividing by 

12, multiplying the result by the number of months for construction, and then subtracting 

the amount estimated in STEP 2.

Monthly Taxes $ 20 x 11 (# of months to construct) = $ 220

minus $ 240 (result of STEP 2) = # -20 Total (enter “0”if negative) $ 0 (STEP 5)

Estimate the borrower’s total financial needs for taxes and insurance by adding the results

of STEPS 2 through 5 = GRAND TOTAL $ 670 (STEP 6)

NOTE: The “GRAND TOTAL” is the amount of taxes due during the construction period 

plus the initial escrow deposit.

Estimate the initial escrow deposit by adding the results of STEPS 3, 4, and 5 =

TOTAL ESTIMATED INITIAL ESCROW DEPOSIT $ 430 (STEP 7)

For borrowers who so elect, and subject to loan underwriting requirements, the Grand Total (STEP 6) may be included in the 

loan amount. The taxes due in STEP 2 will be paid during the construction period from loan proceeds. The estimated initial 

escrow deposit will be forwarded to the Servicing Office when construction is complete, and the loan is converted to an active 

account. If STEP 6 is not included in the loan amount, the borrower must be counseled to save this amount during the 

construction period and pay taxes when due.

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

Attachment 7-A 

Page 4 of 4

ATTACHMENT 7-A

CALCULATION OF ESTIMATED TAXES DUE THROUGH CONSTRUCTION 

PERIOD AND INITIAL ESCROW DEPOSIT

Date Prepared: 6/98

Customer Name: Tony Williams County/Parish: South

Loan Amount: $ 55,000 Loan Closing Date: July 1, 1998

Number of Months in Annual Insurance

Construction Period: 2 Premium Amount: $ 600

Estimated Real Estate Annual Real Estate

Taxes (Lot Only): $ 360 (includes existing foundation) Taxes(AsImproved) $ 1,800 

STEP 1

STEP 2

STEP 3

Estimate the taxes and insurance costs over the next 12 months:

Taxes $ 1,800 divided by 12 = $ 150 monthly (Note: Full taxes were used since next 

Insurance $ 600 divided by 12 = $ 50 monthly tax bill will reflect a completed

house)

TOTAL Estimated Monthly Escrow $ 200 (STEP 1)

Estimate the actual tax bills that will come due during the construction period. The first bill may 

be able to be reduced by the amount of any prorated taxes collected from the seller at closing.

Due: 7/1/98 Amount $ 180 *(Note: Being paid at loan closing 7/1/98) 

Due: Amount $

Due: Amount $

Total Taxes Due During Construction $ 0 * (STEP 2)

Estimate the two month cushion by taking the monthly escrow calculated in STEP 1 and 

multiplying it by two.

STEP 4

STEP 5

STEP 6

STEP 7

Estimated Monthly Escrow (from STEP 1) $ 200 x 2 = $ 400 (STEP 3)

Estimate the initial escrow deposit for property insurance by taking the annual premium, 

dividing by 12, and then multiplying the result by the number of months for construction .

Monthly Insurance $ 50 x 2 (# of months to construct) = $ 100 (STEP 4)

Estimate the initial escrow deposit for taxes by taking the annual taxes due, dividing by 

12, multiplying the result by the number of months for construction, and then subtracting 

the amount estimated in STEP 2.

Monthly Taxes $ 150 x 2 (# of months to construct) = $ 300

minus $ 0 (result of STEP 2) = Total (enter “0” if negative) $ 300 (STEP 5)

Estimate the borrower’s total financial needs for taxes and insurance by adding the results

of STEPS 2 through 5 = GRAND TOTAL $ 800 (STEP 6)

NOTE: The “GRAND TOTAL” is the amount of taxes due during the construction period 

plus the initial escrow deposit.

Estimate the initial escrow deposit by adding the results of STEPS 3, 4, and 5 =

TOTAL ESTIMATED INITIAL ESCROW DEPOSIT $ 800 (STEP 7)

For borrowers who so elect, and subject to loan underwriting requirements, the Grand Total (STEP 6) may be included in the 

loan amount. The taxes due in STEP 2 will be paid during the construction period from loan proceeds. The estimated initial 

escrow deposit will be forwarded to the Servicing Office when construction is complete, and the loan is converted to an active 

account. If STEP 6 is not included in the loan amount, the borrower must be counseled to save this amount during the 

construction period and pay taxes when due.
HB-1-3550

ATTACHMENT 7-B 

TAX SERVICE FEE

Attachment 7-B 

Page 1 of 1

Loan Transaction Tax Service Fee Charged

INITIAL 502 LOAN greater than $7,500

CREDIT SALE WITH OR WITHOUT A SUBSEQUENT

LOAN same as initial 502 loan

504 LOANS if the total outstanding indebtedness is greater than

$15,000 and taxes & insurance are not escrowed through another 

lender

**

**

**

NEW RATES AND TERMS ASSUMPTION WITH OR

WITHOUT SUBSEQUENT LOAN. (NOTE: if financing an 

existing Agency loan with new loan funds, the applicable New 

Loans Tax Service Fee listed below is used, rather than the $10 

fee shown here.)

New Borrower pays $10 regardless of what previous borrower 

paid. No additional charges apply.

$10

SAME RATES AND TERMS ASSUMPTION $0

SUBSEQUENT LOAN if greater than $15,000 and borrower does

not have an established escrow account. **

If borrower has an existing escrow account. $0

** New Loans Approved

September 30, 2023 – September 29, 2024

September 30, 2024 – September 29, 2025

September 30, 2025 – September 29, 2026

September 30, 2026 – September 29, 2027

September 30, 2027 – September 29, 2028

$80.00

$82.00

$84.05

$86.15

$88.31

(01-23-03) SPECIAL PN

Revised (11-21-23) PN 597
HB-1-3550

Attachment 7-C

Page 1 of 3

(01-23-03) SPECIAL PN

Revised (03-09-22) SPECIAL PN

ATTACHMENT 7-C 

INSURANCE POLICY REQUIREMENTS

A. Loss or Damage Covered

Hazard insurance policies must insure buildings against loss or damage by fire, lightning, 

windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke. The flood 

insurance, if applicable, must cover any damage due to flooding conditions.

B. Amount

The Loan Originator must require borrowers with a total indebtedness of more than

$15,000 to obtain hazard insurance to cover the dwelling and any other essential buildings (such 

as a garage). The minimum required hazard insurance coverage is the lesser of the insurable 

value (i.e. the cost to restore the property back to its state prior to a loss) of the dwelling and 

other essential buildings, or the outstanding principal balance of the loan. Although the lesser of 

these two amounts is required, the Loan Originator should encourage the borrower to obtain 

hazard insurance coverage in the amount greater of the insurable value of the dwelling and other 

essential buildings, or the outstanding principal balance of the loan.

Flood insurance must cover the lesser of the outstanding principal balance of the loan or 

the maximum amount of coverage allowed under FEMA’s National Flood Insurance Program 

(NFIP).

The policy must state whether or not the building is on a leasehold. State Supplements 

provide guidance on specific State insurance requirements pertaining to leasehold interests.

C. Borrower’s Deductible

The borrower’s deductible may not exceed the generally accepted minimums based on 

current industry standards and local market conditions. Typically, the borrower’s deductible will 

not exceed the higher of 1 percent of the face value of the policy or $1,000 unless State law 

requires a higher maximum deductible amount. In areas where such deductibles are not 

reasonably available due to local market conditions, i.e. areas on coastal lines or prone to high 

winds, State Supplements will be issued with prior National Office approval to provide guidance 

for current market deductibles. The supplemental guidance must identify the specific areas, the 

associated amount and the detailed justification for each area in the State that is authorized for 

higher deductibles. For flood insurance, these deductibles apply unless the insurance carrier 

requires a higher deductible amount.

D. Term

The policy must have a term of at least 1 year, with evidence that 1 year’s premium has 

been paid prior to or at closing.
HB-1-3550

Attachment 7-C 

Page 2 of 3

E. Effective Date

If there are insurable buildings on the property (as opposed to vacant land to be built upon), 

the policy must be in force at the time the loan is closed. When a dwelling is to be constructed, 

the insurance coverage must be effective as of the date the materials are delivered to the 

property. No payments from loan funds for labor or materials can be made unless insurance 

coverage is in place.

F. Construction Specifications and Use Conditions

If the insurance policy specifies certain standards of construction or prescribes certain uses 

of the property, the policy will be acceptable only if the property meets the specifications or 

conditions.

G. Names and Location

The policy must include the legal names of all parties being insured. It also must contain a 

description of the property’s location, although a legal metes and bounds description is not 

required.

H. Mortgagee Clause

A mortgagee clause ensures that the Agency will be reimbursed in the event of a loss by 

identifying the Agency as the secured party on the lien (the “mortgagee”). The standard 

mortgagee clause adopted by the State must be attached to or printed in the policy, and must 

identify the Agency as the mortgagee. Specifically, the Agency must be identified as the 

“United States of America, acting through the Rural Housing Service or its successor agency.” 

The Agency, and all other mortgagees whose interests are insured under the policy, must be 

shown in either the mortgagee clause or on the declaration page in the order of priority of their 

mortgages. The address should be:

USDA, Rural Development 

Servicing Office

Attn: Insurance Department

P.O. Box 66876

St. Louis, Missouri 63166

Whenever a new mortgagee clause is issued after the policy has been in force, the new 

mortgagee clause must be signed by an authorized agent or officer of the company that issued the 

policy.
HB-1-3550

Attachment 7-C

Page 3 of 3

(01-23-03) SPECIAL PN

Revised (07-16-20) PN 538

When an approved mortgagee clause is not printed in the policy, a “loss payable clause,” 

which lists all the parties that would receive payment in case of a loss, is acceptable, provided 

the Agency will receive payment in case of loss, even in circumstances in which the company 

would not be liable to the borrower. The closing agent must verify that an authorized official of 

the insurance company has sent a signed letter to the State Director stating that all insurance 

policies issued by the company in the State incorporate all the provisions of the standard 

mortgagee clause and that the Agency is named in the loss payable clause (a State Supplement 

will be issued offering guidance on the requirements of this letter and can be found in 

Appendix 7).