It’s natural to wonder what will happen to the money you put into your escrow account if you’re facing foreclosure. The lender collects the escrow money from you throughout the year as part of your total loan payment, as shown on your monthly mortgage statement. The escrow still has money in it for items that aren’t due yet when you first stop paying your loan. However, as the foreclosure progresses, it’s likely your escrow will go into the red.
An escrow is a trust account managed by your lender into which you deposit money to cover escrowed items, usually specific home expenses. Common escrow items include property taxes and your homeowner's insurance premium. Lenders often require an escrow as a condition of loan approval because the account protects the lender's investment. For instance, if you don’t pay your homeowner's insurance and your house burns down, the lender loses its security for the loan. Failure to pay your property taxes puts your home at risk of tax foreclosure.
Foreclosure rules, timelines and procedures vary by area. Generally, if you stop paying your mortgage, your lender can start foreclosure proceedings once you’re 60 to 90 days behind on your loan. If you haven’t paid your loan in months, chances are your escrow is short. Because you haven’t been putting any money into your escrow, your account probably doesn’t have enough money to cover the escrow items. The lender may continue to pay escrow items out of your account even if you’re not paying the loan.
Analysis and Surplus
Your lender is required by law to give you back any surplus in your escrow over $50 and must give you an escrow analysis once a year that details your account activity and gives estimates for the escrow items. However, if you’re delinquent, the lender is exempt from the surplus and analysis requirements.
Your lender may have the right to take money from your escrow account to put toward the total payment you owe if this provision is included in your original loan agreement. So even if you have a surplus in your account despite not paying into it during the foreclosure, the lender can empty the account and apply the money toward the outstanding loan debt.
If you manage to stop the foreclosure, you still may have to re-fund your escrow. Your lender is entitled to reimbursement for escrow items it covered while your account was in the negative. However, once your account is current, you can request an escrow analysis from your lender so you know where you stand.
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