Finding Out How and When:
Several mortgage loan borrowers are seeking answers to inquiry about the use of escrow funds as alternative payment to settle their home mortgage loans. However, answers to this question entails more than just a positive or negative posture, since the use of the said fund depends on the circumstances surrounding the loan.
Veterans Affairs (VA) or Federal Housing Administration (FHA) Mortgage Loans
Escrow funds required under VA and FHA mortgage loans cannot be used as house payment because they are allotted exclusively for property taxes and insurance coverage. These loans were granted by mortgage lenders under special conditions of guarantees provided by their respective federal agencies, to which the prepayment of taxes and insurance strictly form part of such assurances.
Conventional Home Loans with Private Mortgage Insurance (PMI)
A lender, who granted a mortgage loan to a borrower at less than 20% down payment, but covered by a single-premium PMI plan, may allow the borrower to cancel out the escrow funds. Under this coverage, the lender is already assured of recovering the mortgage loan extended to the borrower even if the latter defaults on his payment. The lender's PMI protection includes the physical loss of property resulting from fire, natural calamity or even delinquencies in the payment of property taxes.
Conventional Loans without Special Conditions or Special Assurances
Mortgage loans under this category are those that were traditionally granted under conventional rules and regulations, including the opening of escrow accounts intended as funds set aside for the settlement of future property taxes and prepaid insurance premiums.
Nonetheless, there are escrow fund limits.set forth under the Real Estate Settlement Procedures Act (RESPA). The latter is a consumer protection law, for one-to-four family residential properties purchased by way of loans and other forms of credit. In the event that the funds have exceeded the limit allowed under this statute, the borrower may request the lender to apply the said excess as house payment.
In line with this, the following sections provide explanations on how escrow funds could exceed the amount of mortgage loans.
Understanding the Limit Set by RESPA
As a rule, the Housing and Urban Development (HUD) Agency does not require lenders to impose the prepayment of property taxes and insurance premiums for mortgage loans. These are conditions set forth by mortgage lenders as their own protection against possible losses.
The up-to-date payments of these items, lessen the risks faced by lenders against tax liens or property destruction in cases of fire or occurrences of natural calamities. Some lenders incorporate the prepayments, in the terms and conditions signed by the borrowers; to which the latter are compelled to comply.
However, as mentioned in the earlier section, there is a limit set forth by the RESPA, pertaining to the amount that will be required by the lender. To determine the maximum amount to deposit as escrow, add the actual costs of the property taxes and insurance premiums that are due for the year plus an additional cushion of one sixth (1/6) of the total expenses allotted.
Illustrating by Way of Example:
If property taxes for the year amount to $1,200 and annual insurance premiums amount to $360, the total annual expenses for which the borrower should set aside funds is $1,560. The lender is allowed to add one-sixth of this amount, which is equivalent to $260, hence the maximum fund total to set-up as escrow is $1,820.
Conditions The Give Rise to Excess Funds
Unexpected Property Tax Reductions
A city-wide tax reduction by the city assessor’s office can result in tax adjustments on a borrower's property, which actually happened in California’s LA County and San Francisco Bay Area. Although these circumstances may not be true in all states but are only presented as among the possibilities.
Using this premise as basis for our example, the amount of property tax during the first half of the year was assessed at a tax rate reduced by 12%; thus, the tax paid by the escrow custodian was only 88% (100% – 12%) of the $600 allotted for the first half of the year’s property tax. Actual tax paid was equivalent to $528, resulting to an excess amount of $72 after the 6th month period.
Prompt-Payment Insurance Premium Discounts
The occurrence of a reduction of the insurance premium paid to the insurance company as a result of a prompt-payment discount granted to the borrower. Hence, the amount discounted represents the excess of the previous insurance fund set aside and held by the lender.
Assuming that a 20 percent prompt payment discount reduced the premiums paid for a 6-month period, this means that during the said period, only 80 percent (100%-20%) of the amount alloted for insurance coverage was paid-out to the insurance company.
Using the $360 annual premium as example, to which a 6-month coverage is equivalent to $180, the excess is calculated by multiplying $180 by 20 percent, which is equivalent to $36. Actual premium costs paid for six months is only $144 as against the $180 placed under escrow to serve as insurance prepayment.
Adjustment of the One/Sixth Cushion Added by Lenders
This brings us to the one/sixth cushion allowed to the lender, since it can now be re-computed at a lesser amount. In this case, one-half of the $1,560 fund or $780; has already been applied. It follows, therefore, that the one/sixth cushion can also be based on the current amount unpaid, which is the remaining half or $780. Re-computation will bring us to only $130 as the 1/6 cushion which the lender is allowed to retain. The difference of $130 ($260 – $ 130), represents the excess.
Providing a Sample Computation of Excess Funds
Assuming that all circumstances described above are applicable, the next step is to determine the total excess available: .
Computation of Unadjusted Escrow Balance
Property taxes allotment of $ 1,200 less amount paid from the first half, $ 528 = $ 672
Property Tax Balance of Allotment for the 2nd half =$ 600
Add: Excess from the first-half = $ 72
Total Remaining for Property Taxes = $ 672
One-year insurance allotment of $ 360 less amount paid for the first 6 months, $ 144 = $ 216
Insurance Premium for the remaining 6 months = $ 180
Add: Excess from the first-half = $ 36
Total Remaining for Insurance Premiums = $ 216
Add: Lender’s one/sixth cushion allowed by RESPA = $ 260
Actual Balance of Escrow Account after six months = $ 1,148
Re-computation of the Allowed Maximum Balance for the Second-half of the Year
Actual Balance of Escrow Account after six months = $ 1,148
Less: Excess of lender’s one/sixth cushion allowed by RESPA = $ 130
Less: Excess of property tax from first-half allotment = $ 72
Less: Excess of insurance from prompt-payment discounts = $ 36
Maximum Balance of Escrow for the Second-half of the Year: $ 910
Actual Balance of Escrow Account as of the Second-half of the Year = $ 1,148
Excess Amount of Escrow Funds Over Maximum Balance = $ 238
Premises for Negotiations:
The $238 amount represents the total excess amount of the escrow fund, which a borrower can negotiate with his or her lender to apply as mortgage loan payment. Negotiations can be made on the following premises:
- An escrow account is non-interest bearing.
- There is no federal law that requires the non-VA or non-FHA mortgage borrowers to set-up an escrow account for future property taxes and insurance premium payments.
- The lender is still covered adequately against possible tax delinquencies or against failure to pay up-to date insurance premium coverage.
- The lender's cushion as well as the balance of the escrow fund will only be adjusted to the maximum allowed by RESPA.
However, these examples are all provided for informational purposes only. These circumstances provide explanation to some borrowers' claims of using escrow funds to settle their house payments. These should not be misconstrued as professional or legal advice but merely to put forward important facts that furnish answers to the question ““Can I use my escrow to pay my house payment?”
- Mortgage-X Private Mortgage Insurance — http://mortgage-x.com/library/PMI.htm
- Image: Hughes Insurance Omagh January 2011 – by Ardfern -Wikimedia Commons CCA-SA 3.0 Umported.
- Mortgage-X Mortgage Information Service: Escrow Account — http://mortgage-x.com/library/escrow.htm
- Image: Recent results for Fresh Start Foundation by Aleksandrv1 / Wikimedia under public domain.
- The Volokh Conspiracy — Turns Out You Can Fight the Tax Assessor After All — http://volokh.com/2010/07/12/turns-out-you-can-fight-the-tax-assessor-after-all/
- Image: Folder Home by Vadim Plessky / Wikimedia under BSD Licenses.