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Home Buying - Escrow Accounts
For individuals buying a home, they often feel overwhelmed and a bit concerned as they become more and more involved in the process. They will start to hear words and phrases that make no sense, such as “escrow account.” If you are thinking about buying a home, the best thing you can do is educate yourself about the home-buying process and learn all you can about the terminology.

Take the escrow account for example, as mentioned. First, an escrow account is a special account where certain money paid by the homeowner and used to pay for the taxes, insurance, and other such debt. An escrow account falls under Section 10 of the Real Estate Settlement Procedures Act, also called RESPA, which states that a lender can ask a borrower to hold this money but there are limits. Additionally, the lender is required to provide both an initial and annual escrow account statement to ensure they are adhering to this law.

Covered under RESPA does not require borrowers to maintain an escrow account for paying these debts. In fact, the decision for the money to be held belongs to the lender. The limitation associated with an escrow account is headed by HUD (Housing of Urban Development), which regulates the maximum amount that the lender can require be maintained.

Additionally, RESPA does not require lenders to maintain a cushion on this account. Now, keep in mind that since 1976, there is a statute that has allowed lenders to maintain a cushion if they like but it can only be equal to one-sixth of the total amount of debt paid out of the escrow account. This amount is approximately two months of escrow payments but if state law allows for a lesser amount, then that amount would take precedence.

Since lenders have begun to increase the level of cushion, new regulations have been put into effect that requires the lender to reduce this amount in some escrow accounts. The problem is the some lenders are giving their customers the impression that is it the HUD regulations that require this increase. The truth is that it is the lender, which is why the government is starting to crack down to make these changes.

When it comes to interest on escrow accounts, Congress introduced new legislation in both 1992 and 1993 where lenders are now required to pay interest on balanced but this particular act was not passed. Now some states do require interest to be paid but this is rare. Do determine the amount of money the lender is allowed to require in an escrow account, you can use the following guidelines to come up with a good estimate.

First, make a list of all the payments made for items paid out of your escrow account along with the date paid. This would include things such as hazard insurance, taxes, flood insurance, and so on.

Now, take this total and divide it by 12 months

You will then create a trial running balance for the next year, once again listing all the payments that will need to be paid and again, when the payments were made.

Next, the monthly balances will be increased so they are brought to the lowest point in the escrow account

You will now add your lender’s cushion to the monthly balances, again remembering that this cushion could be up to one-sixth of the total escrow charges.

If the account has a deficiency, you could be required to reimburse the lender.

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