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"My loan
officer tells me I need to deposit $1157 into an escrow
account at closing to take care of future taxes and hazard
insurance payments, but when I asked him where that number
came from he said 'it is set by HUD' and was unable to
explain it further. Can you shed any more light on this?"
Lenders generally take over responsibility for the
payments of taxes and insurance so that they can be sure
that the payments are made. They require that an escrow
account be established with the borrower's funds, from which
the lender makes the payments as they come due. The escrow
account is established with a deposit that the borrower
provides at closing. To assure themselves that there will
always be enough money in the account, lenders ask for more
than they actually need as a "cushion".
Since lenders usually get to keep the interest on escrow
accounts, in years past, many of them maintained
unreasonably large cushions. To deal with that, the
Department of Housing and Urban Development (HUD) issued a
ruling that placed a ceiling on the size of escrow accounts,
which in turn limited the amount the lender could ask the
borrower to deposit at closing.
The rule is that the deposit cannot exceed the amount needed
to prevent the balance from falling below an amount equal to
2-months worth of tax and insurance payments at its lowest
point during the year. While HUD does not do a lot of
enforcing, my impression is that all but a handful of
lenders follow the HUD rules.
Here is how to calculate the maximum initial deposit
yourself.
■
Add the annual taxes and insurance premiums and divide by
12. This is the amount that will be added to your mortgage
payment every month.
■
List 12 months running down the page beginning with the
month in which your first payment is due.
■
In the
column next to the first one, enter the tax and insurance
payments next to the month in which they are due.
■
In the
third column, show the amount in the escrow account assuming
there is no initial deposit. The monthly payments made by
you add to the account while the tax and insurance payments
made by the lender reduce it.
■
Scroll
down to the month that has the largest shortfall. To the
shortfall add 2-months of payments (the allowable cushion).
The total is the maximum deposit under HUD's rules.
Here is an example:
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The first
payment is due in November.
■
Total
taxes and insurance are $3468, or $289 a month.
■
Hazard
insurance of $618 is due in March.
■
County
taxes of $432 are due in April.
■
School taxes of $2418 are due in August.
Assuming
no upfront deposit, the low point of the escrow account is
reached in August when school taxes are due. Through August,
total payments from the escrow account are $3468 whereas
only 10 payments have been made into the account totaling
$2890. The account would therefore be short by two monthly
payments, or by $578. The lender is also allowed a cushion
of two months, which is $578. Hence, the total required
deposit to the escrow account would be $1156.
Borrowers who don't want to be bothered checking the
lender's calculation of the required escrow deposit are
unlikely to be taken advantage of because lenders can't do
it without violating the law. I suggest that you focus your
attention on the many legal ways that lenders and mortgage
brokers can pick your pocket. I have written about legalized
larceny in other columns, all of which are on my web site.
At the same time, unintentional mistakes do occur at the
closing table which affect the allocation of costs between
sellers and buyers. A recent letter described a $500 mistake
of this sort, which the letter-writer discovered by
accident. It is a good idea, therefore, to check out every
number. |
