Escrow Account Mortgage Guidelines And Requirements

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Escrow Account Mortgage Guidelines And Requirements

This BLOG On Escrow Account Mortgage Guidelines And Requirements Was Written By Michael Gracz National Sales Manager of Gustan Cho Associates

Escrow accounts what are they and are they necessary?

  • I like to think of an escrow account as a checking account opened up in your name that only will pay your property taxes and insurance for you when they are due
  • The reason I say checking account is the money in your escrow account is ”your money”
  • Lenders have Escrow Account Mortgage Guidelines And Requirements
  • Each month you will budget 1/12 of the total needed to cover your property taxes and homeowner’s insurance premium
  • This is one way for the lender to make sure you will not default on your property taxes
  • The purpose for  Escrow Account Mortgage Guidelines And Requirements is so lenders can monitor to make sure your home is insured
  • Even when your home is paid off you will still pay your annual property taxes
  • At that point it is up to you if you want to keep insurance on the property
  • But let’s be honest majority of Americans keep insurance on the property
  • Having an escrow account is an EASY way to make sure your important housing bills are paid on time
  • Considering in 2017, 34% of home buyers are millennials who have a reputation for being forgetful, escrow accounts are more common than ever
  • You are also required to maintain an escrow account until you pay your Loan-To-Value (LTV) down to 80% with conventional financing
  • Longer with majority of FHA loans (life of the loan), and always throughout the life of the loan with a VA loan

Escrow Account Mortgage Guidelines And Why Home Buyers Fear Escrows

Many Americans feel an escrow account is a rip-off:

  • This is because they cannot make interest on their money
  • Let’s be honest you do not collect much in interest on a few thousand dollars
  • In my opinion minimizing the risk to be late on your taxes and insurance is worth a couple dollars you’re missing out on
  • If you do fall behind on your property taxes you can lose your home
  • If for any reason you fall behind on your homeowner’s insurance, your servicer will put forced-placed insurance on your property that includes a very high cost insurance plan with a high deductible
  • They do this to protect their asset from any damages
  • Until you pay off your loan you are required to have homeowner’s insurance on your property
  • That being said, escrow accounts are a great way to keep your taxes and insurance up to date
  • Out of sight out of mind!

Negatives With Escrow Account Mortgage Guidelines

I recently had an old client of mine call me and tell him nightmare about his escrow account.

  • The ending of the story worked out, but this is an example when escrow accounts can go bad
  • For purposes of this blog I will change the client’s name to Brian
  • Brian moved to Kane County, Illinois
  • Brian bought his house in May of 2017 for $420,000 and put down 5% or $21,000
  • He took the loan out for $399,000
  • When he bought the house in May 2017, the county had his property taxes assessed at a value of $650,000 and an annual premium of $16,400!
  • That means his lender had to hold $1366.67 per month just for property taxes

Why Are Escrow Accounts Set Up

Escrow accounts are set up with where property taxes are at the time of the transaction according to the county tax bill:

  • After buying the home, Brian went to the county with his appraisal showing the home is worth $420,000
  • After review, the county lowered his taxes to $10,596.04 annually or $883.01 monthly
  • Then called his mortgage servicer and told him about the tax update
  • Formed him that they will do an escrow review every June
  • So, Brian had to wait until June of 2018 for this to be updated
  • Well June came and went and during the escrow review they decided to keep paying the full amount of $16,400
  • Brian called me, even though his loan was purchased by a servicer who I do not have affiliation with
  • After talking with Brian, I asked him how much he thinks his house is worth today
  • He told me he thinks it’s going up in value to about $500,000
  • He showed me a few comparable homes that sold recently in his neighborhood
  • I let him know if that is the case we should do a rate and term refinance and cancel your mortgage insurance
  • Turns out he was right, and his house appraised at $506,000
  • At the end of this frustrating process we were able to get him a new loan with the correct escrow setup. Saving him well over $450 a month
  • He was able to skip two mortgage payments and he will now get an escrow refund of over $12,000
  • They were over holding his money for quite some time

Not every escrow nightmare will have the same outcome as Brian. But keep in mind this is very rare and typically you are able to resolve issues by contacting your service or a real estate attorney. The professionals at Gustan Cho Associates are always available to answer any mortgage related questions. Call me directly on 630-659-7644 or text me for faster response. Or email us at mgracz@gustancho.com. Gustan Cho Associates at Loan Cabin Inc. has no lender overlays on government and conventional loans.

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