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Understanding the Escrow Account

Linda Baumgarten

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What is an escrow account?

An escrow account is established for the payment of annual property taxes and insurance premiums. The escrow account is funded by monthly escrow installments which are billed to the underlying mortgage account along with the principal and interest payments in accordance with RESPA (Real Estate Settlement Procedures Act) and state guidelines. This is a free service provided by Ocwen to facilitate the timely payment of the property taxes and insurance. Failure to pay the property taxes can result in the loss of the property through a tax sale. Failure to pay the insurance will result in lender placed insurance coverage, which may require a higher premium than the current policy. To prevent these situations, we strongly recommend our homeowners retain an escrow account. Unless required by state law, Ocwen will not typically pay homeowners association dues and some other items commonly referred to as “special assessments.”

Is there a minimum balance that must be held in the escrow account?

Yes. The escrow account will have what is commonly referred to as a “cushion,” which helps to prevent the account from having a negative balance due to any unanticipated disbursements or increases in escrow items. The escrow cushion is calculated as two escrow payments, or 1/6th of the total estimated yearly tax and insurance payments. For example, if the sum of the yearly tax dues and the yearly insurance premium equal $3,000, the escrow cushion amount will be $500 ($3,000 divided by 6). In this example, there would never be an escrow balance of less than $500. Note that cushion requirements vary by state. Please contact the customer service department for more information on state-specified requirements.

What is an escrow analysis?

An escrow analysis is a review of the yearly property tax and insurance obligations and is used to determine the escrow payment required to cover future tax and insurance installments. Ocwen will forward an escrow analysis statement at least once every 12 months with the history and projections of the incoming and outgoing payments.

What happens if the escrow balance is lower than it should be?

Due to changes in property taxes or insurance premiums, it is possible the escrow account could end up with a balance which is less than the target cushion account. This is referred to as a “Shortage.” Any shortage of funds in the escrow account will be determined at the time of the escrow analysis. In order to repay the shortage amount, two options are available:

  • The shortage may be paid all at once. Once the payment is received, the escrow account will be reanalyzed, and a new escrow analysis statement will be sent.
  • If no action is taken, Ocwen will add the amount of the shortage to the escrow payment and will spread the collection of the shortage amount over a prorated period specified on the escrow analysis statement. If there is an inability to make the mortgage payment, the Ocwen Customer Care Center is available at (800) 746-2936 to discuss possible options.

What happens if the escrow balance is higher than it should be?

Due to changes in property taxes or insurance premiums, it is possible the escrow account could end up with a balance which is greater than the required cushion amount. This is referred to as a “Surplus.” This is determined at the time of the escrow analysis. The surplus funds will be returned within 30 days of the date of the escrow analysis, provided the overall mortgage account is current as of the date the escrow analysis is completed.

Sources:

https://www.spservicing.com/StaticDetails/EscrowFaq

http://www.pennymacusa.com/faq/taxes-and-insurance

https://www.newhomesource.com/guide/articles/escrow-accounts-explained

http://www.wisegeek.com/what-is-an-escrow-account.htm

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