Mortgage lenders require borrowers to maintain an escrow account to ensure timely payment of homeowner’s insurance and real estate taxes. The homeowner makes monthly payments to the account and the lender makes payments as the insurance and taxes become due. While looking through your stack of documents, you may start seeing new terms that you have never heard of or are unsure of what they mean for you. Escrow Analysis is one such term that seems like it should be pretty straightforward but that a lot of people are confused by. As a homebuyer with a mortgage, you will need to understand this concept before, during and after your real estate transaction.
In essence, Escrow Analysis is a means of determining, on an annual basis, whether the borrower is paying too much or too little so an adjustment can be made to the monthly payment. Keep reading to understand what this means to you and your loan payments.
What is an Escrow Account?
Escrow accounts are generally required and controlled by a mortgage lender to guarantee that a homeowner is able to create a monthly budget that includes the additional costs associated with owning a home. These expenses typically include such things as property taxes, homeowners
insurance, flood and optional insurance, as well as private mortgage insurance (PMI). An escrow account provides a convenient, no-hassle service by allowing the escrow company to pay your tax bills and insurance premiums for you.
Establishing an Escrow Account
An escrow account is established at the real estate closing when the homebuyer becomes the new property owner. A lender can require up to two months payments of taxes and insurance. The annual cost of homeowner’s insurance and real estate taxes is calculated then divided by twelve to determine the monthly cost. If the borrower is required to maintain flood insurance, that amount would also be calculated. The borrower then pays two months which becomes the initial balance in the escrow account, sometimes known as the “cushion.”
What is an Escrow Cushion?
An escrow cushion is an additional balance in the escrow account ensuring that there is always enough money in the account to cover expenses for the property. This is the lowest the balance in your escrow account should ever fall, assuming no unexpected increases or additional payments occur during the year. Escrow account regulations fall under the federal law called Real Estate Settlement Procedures Act (RESPA). The RESPA statue allows HUECU to maintain a cushion equal to two months of escrow payments.
What is an Escrow Analysis?
Every year an escrow analysis is performed on your escrow account. This is an examination of your account to determine if the current monthly deposits will provide sufficient funds to pay your taxes and insurance for the next full year, as well as provide the appropriate cushion. The escrow analysis identifies any overages, shortages, or deficiencies that exist at the time the analysis is performed, and adjusts the total monthly payment accordingly.
Escrow analyses are typically run annually based on your property tax payment cycle. Occasionally, the payment of taxes or insurance causes the escrow account to reach a negative balance, and it may be necessary to perform more than one analysis during the year. Your lender or escrow holder will use a variety of techniques to avoid a negative balance in your escrow account. In many circumstances, if the escrow agent expects that your account will be low one or more months in the future 12-month period, you will be required to make an additional two months of escrow payments to your escrow account as a buffer.
Surplus and Shortages of Escrow Accounts
An overage in the escrow account requires the lender to issue a refund check to the borrower. This would occur if there was a tax cut or the borrower found a less expensive homeowner’s insurance policy. However, in more common circumstances, a shortage is detected. This can be caused by an increase in taxes or the price of the homeowner’s insurance policy. A borrower who receives a letter indicating either an overage or shortage should carefully examine the escrow analysis to verify it was done correctly. The amount of your new monthly escrow payment will be adjusted to account for the increased taxes and/or insurance premiums.
What is a Surplus?
If your real estate taxes or insurance premiums are less than the projected amounts, you could find a surplus in your escrow account. This means that your escrow account has more funds than will be needed to pay your escrowed items over the coming year, including the cushion. Your payments could change if you found a lower cost insurance policy that will affect your surplus amount in the future.
What is a Shortage?
Escrow shortages occur when your real estate taxes or insurance premiums increase, or turn out to be higher than originally projected at loan closing. If this occurs, there will be a shortage in your escrow account, and additional funds must be collected to satisfy the shortage.
How Do I Pay My Shortage?
If the shortage is greater than one monthly escrow installment, the amount will be collected over a 12 month period. If the shortage is less than one monthly escrow installment, you will likely pay the amount over one month. You may also choose to pay the shortage in full by sending the required payment amount (clearly identified as a shortage payment) separately or with your current required monthly mortgage payment.
Will My Escrow Payment Amount Remain the Same If I Pay My Shortage in Full?
Even if you pay your shortage in full, your monthly escrow payment will still change if your annual real estate taxes or insurance premiums change. This will avoid the shortage issue in the future.
What is a Deficiency?
If the actual, final escrow balance is negative, it is called a deficiency. Both a shortage and a deficiency will increase your monthly escrow payment unless you choose to pay these amounts in full immediately.
How Do I Pay a Deficiency?
If the deficiency is greater than one monthly escrow installment, the amount will be collected over a 12 month period. If the deficiency is less than one monthly escrow installment, you will likely pay the amount over one month. You may also choose to pay the deficiency in full by sending the required payment amount (clearly identified as a deficiency payment) separately or with your current required monthly mortgage payment.
What Happens at Citrus Heritage Escrow?
During the escrow period, our title department begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200