Escrow
How an escrow analysis works
By the YourHomeCosts editorial desk. Last updated . General information, not personal advice.
An escrow analysis is the yearly statement that explains the part of the mortgage payment that is not principal and interest. The servicer holds that money and pays property taxes and homeowners insurance when they come due. The CFPB describes an escrow account as the monthly set-aside that replaces one or two large bills a year. The analysis is how the servicer resets the monthly amount after those bills change.
Educational information only. This is not financial, tax, legal, lending, insurance, or appraisal advice. Loan documents, state law, and your servicer or assessor control. Confirm every figure before you act.
What the annual analysis is doing
The statement looks backward and forward. Backward: deposits in, bills paid out, and the balance that resulted. Forward: the taxes, insurance, and any other escrow items the servicer expects to pay in the next 12 months, and the monthly deposit that funds them. For most loans with escrow, the CFPB says the servicer must provide an annual escrow account statement with the history and a projection.
If the bills were higher than last year’s projection, the account can finish the year short. The new monthly deposit then has two jobs: fund the higher bills, and repay the shortage. If you only compare this month’s coupon with last month’s, those two jobs look like one number. The analysis is the page that separates them.
Shortage, deficiency, and surplus
A shortage means the projected balance is below the target, but the account is not described as negative. A deficiency means the account is negative: bills were paid with money the account did not have. A surplus means the projected balance is above the target. An annual analysis lands on one of those results, or on neither. Seeing a shortage and a surplus on the same projection is a reason to ask which line is which.
The collection rules are in 12 CFR § 1024.17. For a shortage smaller than one month of escrow, the servicer may leave it, collect it within 30 days, or spread it over at least 12 months. For a shortage at least as large as one month of escrow, the listed choices are to leave it or to collect it in equal payments over at least 12 months. A single 30-day bill for a shortage of that size is not on that list.
A deficiency of at least one month of escrow, when you are current, may be left in place or collected in two or more equal monthly payments. That is a different minimum than the 12-month shortage rule. A surplus of $50 or more is refunded within 30 days of the analysis if the payment was received within 30 days of the due date. A smaller surplus may be refunded or left as a credit toward next year.
The one-sixth cushion
The cushion is the low point the servicer builds into the projection so a bill does not overdraw the account. The federal cap is one-sixth of the estimated total annual disbursements from escrow. Divide the year’s tax, insurance, and other escrow bills by six. A required cushion above that figure is the number to question. One-sixth is about two months of those bills. The monthly collection for the bills themselves is a separate figure: up to one-twelfth of the annual disbursements.
The cushion test does not decide whether the tax bill or the insurance premium is fair. A premium can be high and the cushion can still be within one-sixth. A premium can be unchanged and the cushion can still be over the cap. Check both. Some states and some notes set a lower cushion than the federal maximum. The federal rule is the ceiling the analyzer on this site uses.
How to read the statement
- Find the projection for the coming year and the history of the year that just ended.
- Match the tax disbursement to the tax bill and the insurance disbursement to the declarations page.
- Circle shortage, deficiency, or surplus. Only one of those should describe the result.
- If a shortage is being collected, divide it by the number of months. Twelve is the floor when the shortage is at least one month of escrow.
- Divide the year’s escrow bills by six and compare that with the cushion. One-sixth is the federal maximum.
- Add the new monthly escrow deposit to principal and interest. That sum is the new payment, before any HOA you pay on your own.
The payment explainer accepts those figures, or a photo of the statement, and runs the cushion and shortage checks. The CFPB’s page on escrow problems is the place to start if a bill was not paid or the payment changed with no explanation.
Questions people ask
What is an escrow analysis?
It is the servicer’s yearly accounting of the escrow account. It shows what was collected, what bills were paid, whether the account is short or ahead, and the monthly deposit for the coming year. For most mortgages with escrow, the servicer must send an annual escrow statement.
What is the difference between a shortage and a deficiency?
A shortage is the amount by which the account falls short of the target balance in the projection. A deficiency is the amount by which the account is actually negative. The collection rules in 12 CFR § 1024.17 are not the same for the two.
How long can a servicer take to collect a shortage?
If the shortage is at least one month of escrow and the servicer collects it, the rule calls for equal monthly payments over at least 12 months. The servicer may also leave the shortage in place. A 30-day demand is not listed for a shortage of that size.
What is the one-sixth escrow cushion?
Under 12 CFR § 1024.17, a servicer generally may not require a cushion larger than one-sixth of the estimated total annual escrow disbursements. That is about two months of those bills. The monthly deposit is up to one-twelfth of the annual amount the servicer reasonably expects to pay.
Sources
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