Mortgage lenders often require that your monthly payments include a set amount for an escrow account. These payments accumulate throughout the year. Your lender then uses the money to pay your annual real estate taxes, your homeowners insurance and other fees as they become due.
After your lender has made all required annual payments, you might have money left over in your escrow account. Federal law determines whether your mortgage company must refund the difference to you or not. The total amount of your escrow account surplus is the main factor, but it isn’t the only consideration.
If your escrow account is over-funded and meets the guidelines set in the federal laws, you will be issued a refund.
Establishing Your Escrow Account
The Real Estate Settlement Procedures Act is a set of federal regulations that govern transactions between mortgage loan borrowers and mortgage lenders. To establish your escrow account, this law requires that lenders create an initial escrow analysis statement. The lender must provide it to you on the settlement date for your property purchase or no later than 45 days after the loan begins.
Your initial escrow account analysis must contain the amount of your total monthly payment. This total must show the total amount of the payment that the lender will allocate to your escrow account. This statement must contain itemized estimated amounts that the lenders expect to pay for each expense by type.
Mortgage Escrow Account Estimates
To establish the appropriate amount to require from you each month, your mortgage company estimates your annual payments for real estate taxes, homeowners insurance and miscellaneous fees, if any. At the time of your purchase, the mortgage company uses the previous owner's tax record to calculate your taxes. Your mortgage company also receives a copy of the bill from the company that will insure your home.
Either or both of these amounts can change from one year to the next. Real estate tax rates can increase because of your home's value, or they can decrease. Local discounts that you might qualify for, such as a homestead exemption, might take effect after the mortgage company establishes your escrow account payments. Your homeowners insurance might decrease when you don't have any substantial claims over a period of time.
Payment Limits for Escrow Accounts
Depending on the conditions of your mortgage loan, your lender can require you to pay the total amount of your estimated escrow payments for the first year at settlement. The lender uses all of this money to fund your initial escrow account. If the lender does not collect the estimated total at settlement, you must fund your initial escrow account in monthly installments.
Generally, RESPA rules limit the maximum amount that your lender can require you to pay into your escrow account monthly. This maximum is 1/12 of the total estimated annual payments that the lender will make from your account.
The rules also have exceptions for fees or costs that your lender might pay every other year or every three years. For these payments, the monthly escrow payment due from you is not divided by 12 months. Instead, the lender divides the estimated payment by the number of months in the payment’s term.
Annual Escrow Account Analysis Rules
Federal laws also dictate the frequency of your subsequent escrow statements. Once you establish an escrow account, RESPA rules require that your mortgage company complete an annual escrow account analysis. The company must provide you with a copy within 30 days of its completion.
The annual escrow analysis period isn’t necessarily a calendar year. Under RESPA rules, mortgage lenders can complete a partial or short-year analysis, in certain circumstances. Frequently, lenders use the partial escrow annual period to put your escrow accounting reporting on the calendar year. This lets them include your escrow analysis with documents such as your tax and interest statements for the IRS.
Each annual escrow analysis shows the total amount collected from you and deposited into your escrow account. It also provides detailed information on the type, amount and date of each payment made from the account. The statement also calculates any difference between the amount you paid into the account and the amount the lender paid out from the account.
Escrow Account Refund Rules
When your mortgage escrow analysis shows that you paid at least $50 more than the amount that the mortgage company disbursed, you are usually eligible for a refund of the difference. However, federal law allows the mortgage company to have a cushion to prevent an escrow shortfall in the future. RESPA rules set the maximum cushion at 1/6 of the total estimated annual payments that the lender will make on your behalf during the next escrow year.
When your escrow account has a balance of less than $50 in surplus, federal law allows the mortgage lender to keep this amount as a credit in your escrow account or to send you a refund. In this case, the mortgage company has the right to decide. Normally, it's more convenient for you both to let a small surplus remain in your escrow account. If the mortgage company decides to give you a refund option, it will notify you of its decision before sending your refund.
Important RESPA Refund Provisions
The RESPA rules for your annual escrow analysis and escrow refunds do not apply if your loan account is in default. RESPA rules say that your account is current only if the lender receives your monthly payment within 30 days of its due date. If you are not up to date with your loan payments, your lender has the right to withhold all surplus funds in your escrow account.
If your lender starts foreclosure proceedings, federal law waives the requirement for the lender to perform an annual escrow analysis. The lender doesn’t have to send you escrow analysis statements during the foreclosure process. RESPA also waives the escrow analysis requirement if the borrower starts bankruptcy proceedings.
If a lender reinstates your loan instead of foreclosing on it, the lender must provide you with a special escrow statement. It will cover the entire period of time since the last annual statement that you received. RESPA rules require the lender to send this statement no more than 90 days after your lender deems that your loan account is current again.
Loan Payoff Escrow Account Refund Rules
Your lender must follow specific RESPA escrow rules when you pay off your loan. In order to pay off your loan, you usually need to get a payoff statement from your lender. This statement indicates the total amount required from you at payoff.
Because lenders must separate escrow funds from principal and interest payments on your loan, your payoff statement will show any surplus amount in escrow. Within 20 business days after your loan payoff, your lender must refund your escrow account surplus even if it is less than $50. RESPA rules also require the lender to send you a partial year escrow statement within 60 days after payoff.
RESPA Provisions for Transferred Loans
Mortgage lenders sometimes sell or transfer your mortgage to a different servicer. When this happens, federal law requires that both financial institutions follow RESPA rules. When the lender transfers or sells your loan, they also transfer your escrow account to the new loan servicer. The lender that initiates the transfer must send you a short-year escrow account analysis within 60 days of any loan transfer.