A brief introduction to the Escrow Analysis and tips on how to understand them.
Mortgage Servicers must review every borrower’s escrow account at least once every twelve months. In that review, called an Escrow Analysis, they compare what has been collected from the borrower to what has been paid out from the account. While the calculations involved in that analysis can be complex, most often that leads to one of two scenarios:
- If a borrower’s tax and/or insurance bills have increased, their monthly payment will need to increase too.
- If a borrower’s tax and/or insurance bills have decreased, their monthly payment will need to be reduced.
The former is more common than the latter, but both are possible.
Each Servicer chooses their analysis calendar in a different way. Most use a state-based calendar, running an entire state at the same time every year. Some choose to run the analysis on the anniversary of the loan’s closing. But virtually any schedule could be chosen for any number of reasons.
The Analysis will result in an Escrow Account Disclosure Statement being sent to the borrower. While we always encourage a borrower to contact their current Servicer for specific assistance with reading and understanding that statement, we may from time to time get requests for help. When looking at an analysis statement it is often helpful to start by identifying what changed, and how much it changed. The statement must include a record of account activity since the last analysis compared to what was expected to occur. Identifying those differences in the bill amounts is a key indicator of what the ultimate payment changes will look like.
Basic Escrow Calculations
The most basic piece of an escrow analysis is to identify the amount they are required to collect monthly. A Servicer does that by taking the total amount of their annual tax, insurance and mortgage insurance (if applicable) bills and dividing them by twelve.
The next step is to identify how much is needed in the escrow account to ensure that it never drops below a required minimum balance. Typically the minimum balance, or Cushion, is equal to two months’ escrow payments.
Tax bills: Due twice a year at $250 per installment = $500 annually
Insurance: Due once a year at $400 = $400 annually
Mortgage Insurance: Due every month at $25 = $300 annually
Total annual bills: $1200
Monthly escrow payment: $1200 / 12 = $100 per month
Escrow Cushion: $100 x 2 = $200
Finally the Servicer will use the bill amounts and their due dates, along with the new calculated monthly payment, to project the escrow activity to come in the next twelve months. When this is complete the Servicer will identify the projected lowest balance and compare it to the Cushion. If this projected low point is greater than the Cushion then the servicer will likely refund some balance to the borrower. If the projected low point is lower than the Cushion then the servicer will identify the difference as a shortage. This shortage is then divided by twelve and added to the monthly payment.
All of this information for a borrower's specific loan is required by RESPA and the CFPB to be included on the Escrow Account Disclosure Statement.