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Escrow
The process of using a third party ¨C usually a closing officer - to handle the exchange of funds between buyer and seller in a real estate transaction. The escrow company is a fiduciary. Some states may use attorneys in lieu of escrow companies. Funds are deposited in an escrow account that neither the buyer nor seller can access. These funds may include the home's down payment and fees owed to insurers and real estate agents. The closing officer ensures that buyer and seller pay appropriate funds at loan closing.
Escrow account
Escrow funds are collected monthly with the monthly mortgage payment and deposited into the escrow account. The monthly escrow deposit consists of one-twelfth (1/12) the last annual tax, insurance, and mortgage insurance disbursements, if applicable. The current tax, insurance, and mortgage insurance bills are paid from the escrow account as they become due. Items that may be escrowed, include: city taxes, county taxes, township taxes, borough/village taxes, school taxes, ground rent, hazard insurance (homeowner's insurance), flood insurance, earthquake/windstorm insurance, private mortgage insurance (PMI), and/or FHA insurance.
Escrow Analysis
Escrow analysis is the review of the escrow account for each borrower. The Real Estate Settlement Procedures Act (RESPA) regulations require that an annual escrow review (disclosure statement) be provided to the borrower within 30 days of the end of the computation year. The computation year begins with the first payment and ends 12 months later. The review determines whether enough funds are being collected to pay future real estate tax and insurance bills. If the review determines that there are not enough funds, the borrower will have to remit additional funds to the escrow account. If the review determines that too much money was collected, the surplus funds are refunded back to the borrower. The monthly payment amount may also be adjusted at this time.
RESPA requires lenders to use the Aggregate method of analysis. The Aggregate method essentially takes all escrowed items and adds them together (including any possible shortages). The total is prorated over 12 months. A running balance is projected including amounts deposited into and disbursements made from the escrow account.
If an escrow surplus is determined, RESPA requires that any surplus greater than $50.00 must be refunded to the borrower. Should the account be delinquent, the borrower must bring the account current to receive the surplus. If an escrow shortage is determined, the borrower has the option of paying the shortage in full or having it prorated for twelve 12 months and included in the monthly mortgage payment. An escrow advance occurs when the escrow disbursements create a negative escrow balance. The lender provides the additional funds necessary to pay the escrow bills.
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