At this point in your homeownership journey, you may know about escrow accounts — and that your lender or servicer might require one. Your mortgage servicer wants to ensure your property bills, like taxes and insurance, are paid on time. So you pay a portion of the estimated yearly total of the property bills into an escrow account each month. While this will increase your monthly payments, escrow accounts can provide peace of mind in knowing that the money for those property bills is already set aside.
How do servicers set the amount a borrower must pay into the account? It’s based on a combination of factors, including the year-to-year fluctuations in your property taxes and insurance premiums, account balances, and recent payments. You’ll know what’s expected thanks to an escrow account analysis, which is a review of the escrow account required by federal law and conducted by the mortgage servicer prior to the opening of the account and then each subsequent year. Your servicer is required by law to send you a statement outlining the details of the review.
According to the mortgage pros at Mr. Cooper, that subsequent yearly analysis focuses on three main areas:
- Your expected taxes and insurance premiums for the coming year
- Your escrow account balance, monthly payment amount, and minimum required balance
- The recent tax and insurance payments (or “disbursements”) the lender has made with your escrow funds
The timing of your analysis depends on the state in which you live and is normally conducted around the same time each year. An escrow analysis first focuses on the coming year’s property bills that will be paid, or “disbursed,” out of a borrower’s escrow account. Have property taxes increased? Have insurance premiums gone down? Bill predictions like these will affect monthly payments.
Additionally, an escrow analysis will determine the existence of a deficiency or shortage in the account, meaning that a borrower may need to pay more in addition to any increases caused by an increase to the coming year property bills. Upon advancing funds to pay a disbursement, this may cause the escrow account to have a negative amount commonly called a deficiency. Advances may also cause the account to fall below the minimum balance creating a shortage. A servicer may seek repayment from the borrower for the deficiency or shortage by increasing the monthly payment, above the amount needed to pay the property bills over the next year. An escrow account could also have a surplus.
Both potential outcomes, shortage or surplus, depend on the minimum required balance, which is governed by the loan documents and state law. Typically, the minimum account balance is equal to twice the monthly escrow payment. An escrow analysis will ensure your balance never dips below that cushion.
If the escrow analysis results in a shortage, the borrower will have the option to pay the shortage in one lump sum or over a period of 12 months.
If the escrow analysis results is a surplus, the escrow analysis statement may include a refund check. If the surplus is less than $50, or if the loan is not contractually current, the servicer is not required to refund the surplus.