November 4, 2020
An escrow account is a tool you and the lender can use to simplify mortgage payment issues with respect to property taxes, homeowner insurance, and other payments.
Depending on the nature of your mortgage your lender may require the use of escrow, especially if you are applying for a One-Time Close construction loan or an FHA 203(k) Rehabilitation loan or 203(k) refinance loan.
Escrow accounts make it possible for some hands-off payments for property taxes and other expenses. Escrow may be required by law depending on the state you’re buying in and the circumstances of your loan.
Escrow accounts may be referred to as impound accounts and if you are putting a fixed amount of money into escrow each month (via your mortgage payment), your lender is basically letting those funds accrue until the bill is due on those property taxes, homeowners insurance, etc.
This is done instead of hitting the homeowner with a much larger bill once per year.
How does the escrow process work? Your monthly mortgage payment consists of your principal balance, the interest payment, plus mortgage insurance, property taxes, and any other required expense that is lumped into your monthly payment.
The lender accepts your payment and places the property tax money and other expenses (insurance, etc.) into escrow minus the principal and interest.
The specific details of this will depend greatly on what is listed in your legally binding purchase contract or loan agreement.
Because payment of property taxes is crucial–you can lose your home if you fail to pay them–and because the amount of those taxes may be subject to change from year to yet, you may find your monthly payment fluctuates accordingly.
If you see changes in your monthly mortgage payment you don’t recognize this might be the culprit.
Those who do not use an escrow account will be responsible for making such payments themselves and doing so is absolutely critical. The government consumer watchdog agency, the Consumer Financial Protection Bureau (CFPB), warns mortgage borrowers what can happen if you fail to pay taxes or insurance on your mortgage.
The lender has the ability to:
- Add the amounts to your loan balance
- Add an escrow account to your loan
- Purchase new homeowners insurance for you and bill you for it. Known as force-placed insurance, is “typically more expensive than homeowners insurance you pay on your own” according to CFPB.
Some borrowers are not required to get an escrow account, but choose to do so anyway–this can help you better manage the expenses associated with owning your home.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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