Escrow Account Basics – Part 3 – How Is It Calculated?

20 Oct Escrow Account Basics – Part 3 – How Is It Calculated?

Once an escrow account is established, the lender may require a borrower to pay into the escrow account (1) an amount not to exceed 1/12 of the total of all anticipated disbursements payable during the upcoming year. (2) an amount necessary to pay for any shortage on the escrow account, and (3) an amount to create a cushion with this amount not to exceed 1/6 of the total disbursements for the year. RESPA allows lenders to maintain a cushion of no more than two months of escrow payments, unless state law or the loan documents provide for a lesser amount in which case the lower amount shall be the maximum cushion. For example, the loan documents only allow for a one month cushion, then the lender can add an amount not to exceed 1/12 of the escrow payments.

Escrow accounts must be analyzed annually by lenders, and borrowers must be notified of any shortages. Should the escrow account have an overage of more than $50.00 when the account is analyzed, the lender is required to return the excess funds to the borrower. Additionally, lenders are required to pay escrow account items timely so that they do not incur any penalties – provided the debtor (borrower) is not more than 30 days past due.

In some states the lender is required to pay interest on the amounts in the escrow account. Texas is not one of those states.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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