Real Estate Procedures Act – Mortgage Escrow Laws!
The Federal Real Estate Settlement Procedures Act of 1974 (RESPA) restricts loan providing companies and mortgage lenders from demanding more than minimum required escrow payment from home buyers. Further, money lenders are required to give an annual statement of account showing funds in reserve to home buyers. The idea at the back of these laws relating to escrow account is to enable borrowers compare closing costs and to keep an eye on bribes, superfluous referral fees and overcharging for closing services.
So, how do prospective home buyers calculate escrow money? It’s not all that complicated as they imagine it to be. Here is the simplest way:
1. Find out your annual tax payment. Consider your preceding tax bill or the tax bills of owner or seller and divide the amount by 12 to get that estimated monthly amount payable in the escrow account for property taxes.
2. Work out your insurance payment and divide the annual fee of your homeowner’s insurance by 12. This gives your monthly deposit towards insurance.
3. In case you paid less than 20% down payment for the house, you’ll need to pay for your private mortgage insurance (PMI.) Divide your annual premium by 12 to get your monthly PMI payment.
4. Add the above three amounts to finally arrive at the amount you will need to pay every month in your escrow account. However the amount may change, deepening on variations of property taxes and insurance premiums.
For finer details check with the U.S. Department of Housing and Urban Development (HUD).
How RESPA comes into picture?
RESPA debars mortgage holders or lenders from retaining the contributions of homeowners in escrow account. They can’t charge more than the minimum monthly amount when the mortgage falls due. They may charge full amount only if the taxes need to be paid immediately or within 60 days of closing.
The Annual Escrow Disclosure Statement (AED)
At the time of closing you get something called Initial Escrow Deposit (EID). This is nothing but an estimate of what you may guess to be coming into or going out from the account during the period for which you’ll be paying mortgage. The factual AED figures will be provided by the lender/mortgage holder by way of an annual account statement at a fixed date, once every year, at the discretion of the lender. Law makes it obligatory for the lender to provide such statements. Excess amount if any, should be refunded and shortages are to be charged from the homeowners. Whatever be the case, they must amend the monthly sum to accommodate any inaccuracy in calculations. Escrow deficits can be responsible for declaring a mortgage default.
Are Mortgage Escrow Accounts Required by Law?
It’s worth mentioning that a mortgage escrow account is not required by law but lenders can ask for that under certain conditions that they decide. Further, the lenders are not obliged to pay you interest on the fund held in an escrow account. That prompts some borrowers to deposit their escrow money in their saving bank account, enabling them to earn interest and pay insurance and taxes on their own.