Escrow FAQ

It's an account set up by the lender/servicer to pay property related expenses. These expenses typically include property taxes and homeowner's insurance and may also include PMI or FHA mortgage insurance premiums and flood insurance. 

• During the 6-month period beginning on April 1 of each year, interest shall be paid at a rate of not less than the National Deposit Rate for Savings Accounts as published in the month of January of the same year by the Federal Deposit Insurance Corporation.  
• During the 6-month period beginning on October 1 of each year, interest shall be paid at a rate of not less than the National Deposit Rate for Savings Accounts as published in the month of July of the same year by the Federal Deposit Insurance Corporation.

The Banking Department points out that this interest rate is the floor, not the required interest rate.
 

The monthly mortgage payment consists of the loan payment and the escrow payment. The loan payment is the principal and interest payment due (Note amount). The escrow payment is any monies collected for tax, insurance, and any FHA or private mortgage insurance (PMI) premium payments due throughout the year. 

FHA loans will have escrow accounts. Loans that are greater than 80% loan to value when taken out are usually required to have an escrow account. Depending on other variables of the loan, the lender/servicer may require an escrow account. 

The servicer will use property tax payments and insurance payments from the previous year along with any FHA or PMI premiums payments to estimate the total amount needed for this year. The amount of funds currently in the escrow account along with total amount needed for this year will be analyzed to determine the new monthly escrow payment. 

The Real Estate Settlement Procedures Act (RESPA) allows the servicer to maintain a 2-month cushion or reserve to cover unanticipated disbursements or disbursements made before the borrower's payments are available in the escrow account.

The escrow payment is calculated using what was previously paid for taxes and insurance, and what is anticipated for FHA or PMI premiums.  Increases in property taxes and insurance bills are usually the cause for shortages or deficiencies in the escrow account.

• A shortage in the escrow account occurs when the amount in the escrow account is less than the target balance / enough money to cover the disbursements for the year. 
• A deficiency in the escrow account occurs when the amount in the escrow account is negative. 

Generally, the servicer can require the borrower to repay the amount over a period of at least 12 months as part of the new monthly escrow payment. 

A surplus happens when there is more in the escrow account than needed to pay the anticipated property, insurance, and FHA or PMI disbursements for the next year. 

If the borrower is current and the surplus is more than $50, the servicer must refund the amount to the borrower within 30 days of the escrow analysis. If the surplus is less than $50, the servicer may refund the amount or credit the amount to next year’s escrow account.

When a borrower does not pay taxes when due, the mortgage document allows for the servicer to pay the taxes so that the taxes do not become delinquent.  When taxes are delinquent, the taxing authority may place a tax lien on the mortgaged property. 

When a borrower does not renew or maintain an insurance policy, the mortgage document allows the servicer to force place an insurance policy. However, a servicer may not force place a policy until a written notice to the borrower has been delivered or placed in the mail. The first notice must be at least 45 days prior to assessing the charge for the insurance policy.  

First thing to do is contact your servicer and request help understanding how the escrow payment was calculated. If the servicer is using inaccurate information, file a Notice of Error with the servicer explaining the issue along with any documentation. The Notice of Error must be in writing and sent to a specific address, which can usually be found on the periodic billing statement or the servicer’s website. 

Talk to your servicer to determine if your loan is eligible. 

You can find more information on the CFPB website.