Escrow accounts for taxes and insurance: your rights

What an escrow account does

The Consumer Financial Protection Bureau (CFPB) describes an escrow account as one your mortgage lender sets up to pay certain property-related expenses, such as property taxes and homeowner’s insurance, funded through part of your monthly payment. Your servicer collects a little each month and pays the tax authority and the insurer when the bills come due. Some people call it an impound account.

Your monthly mortgage payment then has two parts: principal and interest, which stay fixed on a fixed-rate loan, and the escrow portion, which changes when your tax or insurance bill changes. That is why a payment on a fixed-rate loan can still go up. For the premiums, see homeowners insurance and flood insurance; for how property tax is treated on your return, see the property tax deduction.

Is an escrow account required?

It depends on the loan and the lender. Two federal points are worth knowing:

• Higher-priced mortgage loans. For a first-lien loan on a principal home with a rate high enough to be “higher-priced,” the lender may not close the loan unless an escrow account is set up before closing for property taxes and required insurance (12 CFR § 1026.35(b)). “Higher-priced” means the annual percentage rate (APR) exceeds the average prime offer rate by 1.5 percentage points or more on a first-lien loan within Freddie Mac’s loan limit, or by 2.5 points or more above that limit.
• When it can end. On that kind of required escrow, the lender or servicer may cancel it only when the debt ends, or on your request no earlier than five years after closing. Even then, your unpaid principal must be below 80 percent of the property’s original value, and you must not be delinquent or in default (§ 1026.35(b)(3)).

Other loans may require escrow under the lender’s own terms or the program’s rules; check your loan documents and your Loan Estimate. Condominium and similar association owners may not need insurance in escrow where the association carries a master policy (§ 1026.35(b)(2)(ii)).

How much can the servicer collect?

Regulation X caps what a servicer can require in two ways (12 CFR § 1024.17(c)):

1. Monthly payments: one-twelfth of the total annual escrow payments the servicer reasonably expects to make.
2. Cushion: an extra amount, no greater than one-sixth of the estimated total annual payments from the account.

At closing, the servicer may also collect enough to cover charges that accrued from when they were last paid to your first payment date, computed so the lowest projected month-end balance in the first year is zero, plus the cushion.

Example. Suppose property taxes are $4,800 a year and homeowners insurance is $1,800. Total annual disbursements are $6,600.

The cushion is about two months of deposits, which is a ceiling, not a requirement. A servicer may hold less. These figures are an illustration.

The annual analysis and statement

At the end of each escrow year the servicer must run an escrow analysis to set next year’s payment. It must send you an annual escrow statement within 30 days of the end of the escrow year, with the previous year’s projection or initial statement. The statement shows the account history and a projection for the next year, including your current monthly payment and the part that goes into escrow (§ 1024.17(i)).

Servicers must use aggregate accounting, must not “pre-accrue,” and must pay bills on time (§ 1024.17(c), (k)).

Surpluses, shortages and deficiencies

Surplus. If the analysis finds a surplus of $50 or more, the servicer must refund it within 30 days, as long as you are current (paid within 30 days of the due date). Under $50, it may refund it or credit it against next year’s payments (§ 1024.17(f)(2)).

Shortage. A shortage means the account has less than the target balance, but is not negative. If it is less than one month’s escrow payment, the servicer may do nothing, ask you to repay it within 30 days, or spread it over at least 12 months. If it is one month’s payment or more, the servicer may do nothing or spread it in equal payments over at least 12 months (§ 1024.17(f)(3)).

Deficiency. A deficiency means the account balance is negative. If it is less than one month’s payment, the servicer may let it stand, require repayment within 30 days, or require two or more equal monthly payments (§ 1024.17(f)(4)).

Example. If the $6,600 total above rises to $7,800 and the analysis leaves a $1,200 shortage, that is more than one month’s $550 payment. The servicer can ask you to repay it in equal monthly payments over at least 12 months, which is $100 a month for a year, on top of the higher regular deposit.

If something goes wrong

The CFPB lists these warning signs: a changed payment with no notice of a tax or insurance change, a servicer buying force-placed insurance and charging you, or your local government saying taxes are unpaid. Contact your servicer first. If it failed to pay your taxes, send a copy of the tax bill with a notice of error. Contact the tax authority or insurer quickly, because unpaid property taxes can lead to a tax lien. You can file a complaint with the CFPB online or at (855) 411-2372.

Where states differ

Escrow rules in Regulation X are federal and apply in every state. States differ in what goes into the account: property tax bills, due dates and rates vary widely, and so do insurance costs and flood or windstorm requirements. See property tax in Texas and natural hazards insurance in California for examples, and closing costs in Texas for how the opening deposit shows up at closing.