Profile picture for franklinfam

Does the Lender decide how much goes into escrow account?

 I am a first time home buyer, buying first home in NC. Lender has included 12months of Hazard Insurance and city taxes for escrow account. Is this a set amount by state law or does the lender decides this?
  • February 25 2012 - Staten Island
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Answers (5)

Lenders all follow the same basic formula for setting up escrow accounts, then there are maximums allowed by federal guidelines. 12 months seems seems like to much. I would ask you loan officer for an explanation as to why they are holding that much.
  • February 26 2012
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Lenders run two schedules. 

Simple Answer, we usually run a basic schedule to make sure you have 2 months cushion + whatever needs to be paid during your next 12months of mortgage payments.  Example:  to make it simple, You are closing 3/25/12 first payment is due 5/1 and taxes and insurance are both due same month MARCH 2013.  So, you would have put in 5/1, 6/1, 7/1, 8/1, 9/1, 10/1, 11/1, 12/1, 1/1, 2/1, 3/1 = 10 months of escrow.  You are 1 months short on paying taxes and insurance when it's due.  Plus, they will collect 2 month cushion in addition.  So, at closing that equals 3 month deposit.  This is were the guesstimate stops on a refi.  Purchases, we would collect 12 months to pay the Insurance premium at funding, then pro-rate how much the buyer needs to pay for the property taxes.  This is because the seller won't own the house anymore, the buyer should not be required to pay a full year of taxes if they only owned the house half the year.

  • February 26 2012
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Lenders run two schedules.

Simple Answer, we usually run a basic schedule to make sure you have 2 months cushion + whatever needs to be paid during your next 12months of mortgage payments. Example: to make it simple, You are closing 3/25/12 first payment is due 5/1 and taxes and insurance are both due same month MARCH 2013. So, you would have put in 5/1, 6/1, 7/1, 8/1, 9/1, 10/1, 11/1, 12/1, 1/1, 2/1, 3/1 = 10 months of escrow. You are 1 months short on paying taxes and insurance when it's due. Plus, they will collect 2 month cushion in addition. So, at closing that equals 3 month deposit. This is were the guesstimate stops on a refi. Purchases, we would collect 12 months to pay the Insurance premium at funding, then pro-rate how much the buyer needs to pay for the property taxes. This is because the seller won't own the house anymore, the buyer should not be required to pay a full year of taxes if they only owned the house half the year.

Real Answer:
First, lenders run a schedule of separte accounts for Tax then Insurance etc. Determine lowest point, then add that negative to the starting Bal + 2 months cushion.
Next, the lender then runs a second schedule. Aggregate Escrow schedule. I'll do my best on explaining this. Above is considered Line item accounting. Aggregate is running a schedule combined on the same line with ZERO cushion, then finding the lowest balance point and figuring how negative the account goes. They add that negative figure to the begining of the schedule + 2 month cushion as above. This way, the lowest point in the schedule is equal to 2 months of escrow payments. The Aggregate adjustment is usually a better result than line item accounting.
Finally, the lender compares the TWO and usually results in a credit to the borrower to "split the difference" between the two accounting methods.

To keep things simple, go with the FIRST example I gave you to guestimate. That guestimate should be higher than the actual closing.

Only reason I know this is because my LOS software doesn't do an auto aggregate adj. for me. So I researched it and designed an XLS spreadsheet to do it for me :)

Hope that helps....

  • February 26 2012
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12 months isn't too much if the due date is right after the first payment and it's an annual bill.
  • February 27 2012
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Profile picture for Jesse Storm
These reply's are on the money. LoL your loan officer will pro-rat your taxes for the escrow on the home. Based on when you go to closing and when the taxes and bill are due. They don't just pull these numbers from the sky they are set by Federal and State guidelines. You are all ways paying your taxes a head. If you don't want to do that you have choices. You can do a 20% down conventional loan and not have your taxes and bills escrowed. That means you don't pay then at closing other then what is due. You then have to come up with the whole amount when they are due for tax time. So if your in an area taxes are high you could be looking at coming up with 1-5k for spring taxes and 5-15k for fall taxes. If you don't pay your taxes your county court will take the home for sheriff sale for taxes. Your choice.  
  • February 27 2012
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