19 Oct Escrow Account Basics – Part 2
An escrow account is typically created when the mortgage loan is originated. However, in some instances it can be forced on the borrower during the life of the loan. The typical reason a non-escrowed loan may be turned into an escrowed loan is when a borrower defaults on payment of taxes or after the lender receives notice of cancellation of the borrower’s insurance policy without another insurance policy being in place.
When a borrower defaults on payment of taxes or insurance on a non-escrowed loan and the lender/servicer advances the taxes and/or insurance to protect its collateral, the lender/servicer can establish an escrow account pursuant to the provisions in the mortgage loan documents.
Once an escrow account has been created due to default of payment of taxes and insurance, it will be very difficult, if not impossible, to convince the lender to cease the requirement of an escrow account. This is because most loan documents do not contain a right of cancellation clause for the borrower. Therefore, the borrower may have to resort to refinancing the loan in order to get rid of the escrow account requirement.
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