What is an Escrow Account?

An escrow account is used to collect and hold funds to pay your property taxes, homeowners insurance premiums or other charges when they become due.

The account is often established for you by your mortgage company when you take out your mortgage.  However, if an escrow account was not set up when you took out your mortgage, you may be able to do so now. 

Real estate taxes and insurance premiums must be paid regularly — typically, payments are due once or twice a year — and failure to pay these bills on time may cost you money in tax penalties or result in cancellation of your insurance coverage.

What are the benefits of an escrow account?

An escrow account helps you:

• Manage your budget: You do not have to make lump sum payments when your taxes and insurance are due. You have made monthly payments throughout the year to cover those obligations.
• Gain peace of mind: You don’t need to keep track of when your tax and insurance bills are due.  The payments will be made, on time, on your behalf.
• Ensure that your home is protected: With paid-up insurance coverage and taxes, you protect your investment in your home and meet your lender’s requirements.

Most mortgage companies require an escrow account for mortgages with less than a 20 percent down payment.

How does an escrow account work?

Your monthly mortgage payment includes an amount for property taxes and insurance in addition to the amount you owe for principal and interest.

The amount of your monthly mortgage payment that is for taxes and insurance is placed by your mortgage company into an escrow account. The funds can be used only to pay taxes and insurance on your behalf.

Your mortgage company pays the taxes and insurance bills for you when they are due. Your mortgage company examines any changes in your tax and insurance costs (for example, your local government may change the amount of your real estate taxes). Your mortgage company sends you a statement each year showing the prior year's activity — amounts collected from you and placed in escrow as well as the payments made on your behalf — and showing any adjustments that may be needed based on changes in your tax and insurance costs.   

Here is a simplified example* of how escrow payments are calculated:
Annual real estate taxes: $1,800 ÷ 12 months = $150 per month
Annual property insurance: $720 ÷ 12 months = $60 per month
Total monthly taxes and insurance: $210

So in this example, $210 would be added to your total monthly mortgage payment and applied to your escrow account. You might hear your total monthly mortgage payment referred to as your “PITI” — forprincipal, interest, taxes and insurance.

Do you have an escrow account?

If you are not sure if you have an escrow account, check your monthly mortgage account statement or contact your mortgage company.  Your account statement will typically indicate your “Escrow Balance” and the amount of your total monthly mortgage payment that is applied to escrow.

Should you establish an escrow account?

If you do not have an escrow account, you may want to establish one. Ask your mortgage company for more information.

Want more information?

For more information, talk with your mortgage company to determine if you are setting aside adequate funds in your escrow account or if you should set up an escrow account. Also, the U.S. Department of Housing and Urban Development offers "Frequently Asked Questions about Escrow Accounts for Consumers".

What is Mortgage Insurance?

What is it?
Mortgage insurance is a financial guaranty for the lender that will help to reduce or eliminate a loss in the case of a default by the borrower, and it is almost universally required on loans where there is less than twenty percent equity. That means if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your homes value, you are going to be required to pay mortgage insurance. In other words, mortgage insurance spreads the risk between the lender and the insurance company.


“Why do I have to have it?”
The answer to that is simple: without mortgage insurance, many lenders would not be able or willing to accept the risk of lending without having twenty percent equity, making it significantly more difficult for customers to purchase a home, or use their home equity to consolidate debt or make an addition to their home. So while it may seem like you do not gain any advantage by having to pay mortgage insurance, it may be the factor that is allowing you to gain approval for your loan. In addition, a bill was passed in 2007 that allows people to write off their mortgage insurance on your taxes, just like you would for the mortgage interest that you pay. There are income restrictions on this provision, so check with a tax professional to see if this would benefit you.

“When can I stop paying mortgage insurance?”
The answer to that will vary depending upon how your mortgage is worded, but there are a few general guidelines that are pretty universal. If you have a conventional mortgage, you are going to need to pay the mortgage insurance for at least the first year of your loan. If you have paid down the balance below eighty percent of the original purchase price or value, you can send a written request for the lender to remove the insurance (a lot of contracts say you can request the removal at eighty percent, they are required to remove it when the balance gets to seventy-eight percent). Some lenders will also allow you to pay for an appraisal, and if your home has risen in value to give you the twenty percent equity, they will also remove it. If you have an FHA guaranteed loan, you are going to be required to pay the monthly mortgage insurance for at least the first five years of the loan, and in order to have it removed you need to have the loan balance down to eighty percent of the original purchase price or value; they will not allow you to go off of what the appraised value is.

Mortgage insurance may seem to be an unnecessary monthly cost to many first time home buyers, but it is in fact what allows most people to purchase their first home. With the law that allows homeowners to write this cost off their taxes, it has become a little more consumer friendly as well.

Who is an Underwriter?

A Mortgage Underwriter is an insurance professional responsible for evaluating the risk of a mortgage application, from the financial institution perspective. In this job, the mortgage underwriter is responsible for determining the maximum amount of mortgage granted.

There are three tasks that a mortgage underwriter completes each day: evaluate mortgage applications, determine total mortgage amount, and create risk analysis reports.

When the underwriter receives the loan file, she looks at the total reported household income, down payment amount, and purchase price of the property. A series of calculations are performed to determine if this request falls within the acceptable range of risk, based on the standard criteria of the lender.  A computer software program now performs these calculations.

The total amount of mortgage granted is based on the information provided by the applicant and the guidelines used in the computer program. The mortgage underwriter can adjust this value based on the forecasted value of the property, economic climate and other factors. Banks and financial institutions adjust their levels of acceptable risk all the time, balancing profit opportunities and risk to the institution.

What should I bring with me to meet with my Loan Officer?

You want to be prepared when you meet with your Loan Officer, they will need to do a pre-approval and check your credit, income and assets.

If you are buying you will need the following:  (If they apply to you)

1. Last 30 days pay-stubs
2. W2's for the last 2 years
3. If Self-employed Last 2 years of Tax Returns with all Schedules, you will most likely need to provide personal Tax Returns and Corporation or Partnership
4. If Self-Employed you'll need to will need a Year to date Profit and loss statement
5. Last 2 Months Statements of your Assets (Bank Statements, IRA, 401K, Life Insurance, Money Market accounts, etc.)
6. Child Support or Maintenance Court Order
7. Social Security Award Letter and last 2 years 1099
8. Social Security Number
9. Date of Birth
10. Address history for the last two years

If you are refinancing you will need all of the above plus:

1. Information for Taxes and Insurance for the homes you own
2. Mortgage Statement

If you rent you will need to provide your Landlord's information, phone number and Name.

Also, you will need to know your automobiles make, year and value.  Personal Property value and any other assets you may have.

Please take in consideration that every lender will require different things, these are just some or more of the requirements you will be asked for.

Be prepared to pay an application fee.  Most institutions charge an Application that varies between $500 - $700  Sometimes that covers for your appraisal and credit report, but not all the times and at times it is Non-Refundable, so ask your lender about the Application Fee. 

I want to buy a Home... What do I do now?

Here are some of the first steps on what to do when you are ready to purchase your First Home... I will go into detail in a different post.

The first thing you want to do is find out how much you'll be able to afford so you can have a price range in mind.  You need to talk to a Mortgage Lender first, the most common mistake people make is they think, well, I want to buy a house, I'll call a Realtor... Well, that is not the best first step.  If you have a good realtor, most likely he or she will send you to get pre-qualified or pre-approved for a mortgage.  Really, nobody wants to be wasting time.  You don't want to go see a home that you might not be able to afford or he doesn't want to be showing you houses, taking you around town when you are really not sure if you are going to buy anything soon.

Choosing your Mortgage Lender; You want to look at your local bank first, people are afraid to go their own bank sometimes because they think the process is too long or they simply don't know that they do offer mortgages.  Ask, most Banks and Credit Unions now offer Mortgage loans.  Some banks offer no fees, (not all of them, and you have to keep in mind that there is no such thing as free lunch either, they will charge you somehow, either in the interest rate or application fee).  Other banks offer concessions, maybe if you have a checking and savings account they do offer you a discount.  If you have direct withdrawal you might also get a discount.  It will all depend on the institution.  It does not hurt to ask.  Keep in mind not all institutions offer these benefits.   You can also ask friends and family and see where they have gotten their mortgage loan from, they are your best chance if you are unsure on where to get a mortgage loan from.  Talk to the loan officer, if she or he was able to explain the types of loans, downpayment, loan fees, the process, time frames, you have to go to a meeting with lots of questions.  Loan Officers like that,  you need to ask, so don't be afraid to bring a notebook with questions if you need to.  Ask about rates, monthly payment... how much will you be qualified for?  Now, don't make the mistake a lot of people do.  Don't get into too much.  Nobody else than you knows how much you really can afford.  If you know you can only do $1000.00 a month, and your loan officer tells you, you qualify for a payment for up to $1500.00 don't go for it... you have to consider that your mortgage payment is only one of the many new payments you will have, specially if you are not used to paying utilities, maintenance and such.  So be honest with yourself and be wise.  Don't over do it.  That's the main reason why there are so many foreclosures in the United States at the moment.

Now, you are ready to go house shopping.. This will be a very fun time but could be really stressful and at the same time discouraging.  Specially if you are looking at houses weeks after weeks and you can't find anything you like!  Yes! Hire an agent... he or she will be your best friend for the next few weeks or months...  It will have to be somebody you will be comfortable with so choose wisely, again, ask advise from your friends, relatives or co-workers.  If all fails look in the real estate book and call an agent.  This agent can usually show you any house that is available for sale through a Real Estate Agency.  Depending on the State you live, You do not have to pay your agent unless you are selling a home or they tell you they charge for their services, they usually get paid once they sell the home and they do get a percentage from the sale.  Tell them how much money you are pre-approved for and whom you are working with as a lending institution.  It is your choice on how much you want them involved in the loan process, basically both the Lender and the Real Estate Agent work for you, they are both working to get you in your house as fast and easy as possible.  The agent will be the contact in between you and the selling agent.  It is best if you don't have the same agent working for both buyer and seller, it is kind of a conflict of interest and really as much as you can you want to try to avoid that.

Once you have found a house go back to your lender and give them or have your realtor send them the purchase and sale agreement.  This will get started with the loan process.  This process depending on the institution will take between 30 - 60 days.  Don't fret, this is just normal for these times.  Be prepared to be asked for a LOT of paperwork.  You will wonder, why do they need that?  Well, you have to remember, in times like this, Banks have gotten really tight and have more and more guidelines and things change basically daily, so don't be surprised if they ask you:  Where did that $25.00 deposit come from?  Really, it has happened.  True Story in times like these.  Try to give your lender all the information they request in a very timely manner and if you have questions ask them, but usually there is a big reason for them to ask for a certain document.  Will explain the Loan process in a different Post.

When the loan is approved, and closing documents are sent to Escrow.  You will go sign your final loan documents.  These will be:  the lender disclosures, the Note and Deed of Trust and some closing and state disclosures.  You will most likely not get your keys that day.  Again, depending on the State you are in.  Usually you will get keys to the house the day that your money is wired to Escrow and Loan is Funded and Deed of Trust Recorded.