How Does Forced Escrow Work?

Escrow accounts are savings account established by your mortgage lender to pay mortgage-related expenses such as property taxes and homeowner's insurance. Your lender calculates your total yearly expenses, divides that amount by 12 and adds the amount to your monthly bill. Escrow accounts are not mandatory for all mortgage loans. Forced escrow typically occurs when you fail to pay a mortgage-related bill and the lender decides you need an escrow account.

When you do not pay into an escrow account, you are required to pay your mortgage-related items on time each year. If you miss even one payment, the lender may step in and force an escrow account to your account. According to the Consumer Financial Protection Bureau, your lender could step in, pay the past-due balance and add the amount owed onto your mortgage payment. The additional amount could significantly increase your monthly mortgage payment.

Your lender receives all notifications from your creditors regarding these mortgage-related expenses. If you receive a past-due notice, your lender did also. After receiving notification, the lender may put you on notice to fix the situation immediately or face forced escrow. Your lender might also just pay the bill and then add the amount to your monthly mortgage payment. You receive a letter from the lender notifying you of the payment along with an escrow assessment.

Each year -- and in special situations such as forced escrow -- your lender assesses your yearly expenses for your property, including property taxes, private mortgage insurance and homeowners insurance. They divide the balance of all bills by 12 months and add that amount onto your monthly mortgage payment. Because your bills change each year, expect your monthly mortgage payment to change each year when your lender issues your new assessment.

If you were struggling to pay one of your mortgage-related bills, the increase in your mortgage payment is likely not welcome. You can contact your lender about options for paying your escrow payment. Escrow loan specialists work with homeowners in a hardship to make paying bills easier. Your lender may accept a lump sum to pay off the balance owed. Alternatively, you can ask to extend the duration beyond 12 months to 18 or 24 months to lower the total amount owed.