Mortgage Escrow Guidelines Required By Lenders

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article covers Mortgage Escrow Guidelines Required By Lenders 

What Are The Mortgage Escrow Guidelines Required By Lenders?

Escrow Accounts are set up by lenders to make sure homeowners pay the property taxes and homeowners insurance timely. Escrow accounts are mandatory on all government loans. However, escrows are optional on conventional loans if the borrower has less than 80% loan to value. It is up to the borrower whether or not they want the lender to set up an escrow account. Lenders will collect a proration of the monthly property taxes and homeowners insurance along with the principal and interest every month. In this article, we will discuss and cover the escrow guidelines required by mortgage lenders.

Are Escrow Accounts Mandatory By Lenders

Homebuyers who put less than 20% down payment on a home purchase on conventional loans will normally be required to have an escrow from their mortgage lender for property taxes and homeowners’ insurance. All government loans require escrows. Those home buyers who put 20% or more in a down payment on a home purchase can waive mortgage escrow. They can pay their property taxes and homeowners insurance when it is due separately. For those with an escrow, the mortgage lender will review their escrow account once a year to see whether the mortgage escrow needs to be increased or decreased in order to make sure there are sufficient funds to cover any increases in property taxes and/or homeowners insurance premiums.

Mortgage Escrow For Property Taxes On A Home Purchase

Most states have property taxes re-assessed the year following the home purchase. In this paragraph, we will discuss and cover How escrows work on home mortgages. The property taxes can potentially go up the second year the homeowner owns the home. This can really hurt a homeowner who barely qualified for his or her mortgage loan with high debt to income ratios and any increase in monthly payments can affect their monthly financial budget. There are cities like Chicago, Illinois where property taxes went up double digits year after year in the mid-1990s and 2000’s where many fixed-income homeowners were forced to sell their homes and relocate due to the high property taxes. Property taxes normally go up when the value of the property goes up. For homebuyers purchasing a new construction home from a builder, the initial property taxes are assessed on the property taxes of the unimproved lot. The property taxes most likely will go up the second year the homeowner owns their home which means mortgage escrow will go up significantly to cover the increased property taxes.

Escrowing Homeowners Insurance Premium

Homeowners’ insurance premiums are also held in a mortgage escrow.

  • Homeowners insurance premiums can also increase significantly

For example, if the homeowner lives in Miami and has hurricane insurance and several major hurricanes hit the area year after year, the insurance carrier will most likely increase the hurricane insurance premium.

How Lenders Determine Mortgage Escrow

How Lenders Determine Mortgage Escrow

Once a year, the mortgage lender who is servicing the mortgage loan completes an escrow analysis statement and is mailed to every mortgage loan borrower the lender services.

  • The statement will show the amount collected every month and the amount disbursed for property taxes and homeowners insurance
  • An example of how escrow account can drastically increase is the following
  • If the home buyer were to close on home now and the property taxes need to be paid in November of every year, property taxes for the first year is based on the seller’s previous year’s property taxes
  • Say the next year rolls around and the homeowner receives an escrow analysis by the mortgage lender in January of 2019
  • If the property taxes have not been re-assessed by the county, escrow will remain the same since the lender is still going off the current property taxes
  • Say that lender finds out that property taxes are re-assessed in October of 2019 and come November of 2020 pays the county the new higher re-assessed property taxes

Come January 2020 when borrowers get mortgage escrow analysis, mortgage escrow will increase due to the increase of property taxes.

Property Tax Increases

This can be confusing so the best way to explain this is via an example.

  • For example, if property taxes have increased by $3,600
  • That means additional monthly payment towards property taxes will be $300.00 per month
  • The homeowner will need to pay an additional $300.00 per month for the coming year
  • However, if the homeowner had a shortage of $3,600 for the prior year property taxes since property taxes are always paid in arrears
  • This means that the mortgage lender will escrow the prior year’s monthly shortage of $300.00
  • Plus the coming year’s additional $300.00 per month for a total of $600.00 in increased mortgage escrow

This type of payment shock in escrow can devastate a homeowner, especially those on a fixed income.

Solutions For Those Who Have Payment Shock Increase

Homeowners with a sharp property tax hike and mortgage escrow have gone up significantly and have trouble paying for it, contact the lender immediately and explain to them your situation.

  • The mortgage lender can offer borrowers various options
  • Contact them before getting behind on mortgage payments
  • They are more options to help borrowers when they are current
  • One of the options lenders may do is to spread out mortgage escrow payments to alleviate borrower from the sudden payment shock
  • Another option may be to try to contact the county and see if they have any hardship programs to reduce property taxes

Many counties have special programs to cap property taxes on the elderly, disabled, or those with fixed income.

Increases Of Mortgage Escrow Due To Homeowners Insurance Premium Increase

What are the solutions for those who have an increase in payment shock

Homeowners’ insurance premiums can increase like property taxes which will result in an increase the escrow balance account.

  • For example, for homeowners who filed homeowners insurance claim on their home, the chances are that homeowners insurance premium will go up
  • If the mortgage lender does not catch the increase of homeowners insurance premium until the next mortgage escrow analysis cycle, homeowners are most likely due to a payment shock

Home Buyers who need to qualify for a mortgage with a lender with no lender overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.