The initial escrow disclosure statement details the specific charges that a homebuyer will pay into escrow each month as part of a mortgage agreement. The lender provides the statement to the borrower. Typically, the lender produces the statement at the time the loan is settled, but legally lenders have a maximum of 45 days to provide the borrower with an initial escrow statement, according to the Department of Housing and Urban Development.
Escrow and Home Financing
Mortgage lenders commonly use escrow accounts to ensure that borrowers pay certain bills related to the property. The most common use of escrow for mortgages is to pay property taxes and house insurance. If you are a borrower with an escrow arrangement, you simply pay a set amount each month on top of the amounts that you owe for principal and interest on your loan. The lender holds the funds in escrow until the bills are due. When the tax and insurance bills are due, they are paid directly from the escrow account. This arrangement makes paying certain important bills an automatic task for borrowers.
Elements of the Statement
The actual items on the initial escrow disclosure statement are straightforward and simple. The statement includes an item-by-item accounting of the estimated payments that will come from the escrow account and the monthly payments that the borrower will need to make to honor those commitments. The statement will only cover the first 12 months of a home loan. Lenders must provide borrowers with an annual escrow disclosure statement, which provides a summary of the deposit and withdrawal activity on the escrow account for the past year, details any shortage or surplus in the account and explains whether the money will be held for future payments or returned to the borrower.
The point of the initial escrow disclosure is to ensure that borrowers know at the outset of their loan what their monthly escrow payment will be. This helps give borrowers a clear picture of what their loan-related financial obligations are beyond the loan itself. The Real Estate Settlement Procedures Act requires the initial escrow statement as an aid for borrowers as they navigate the paperwork and commitments of taking out a home loan. In particular, the initial escrow statement is designed to prevent instances in which borrowers underestimate their monthly payment by a significant amount and subsequently struggle to pay their bills.
Some common errors arise in the composition of an initial escrow disclosure, according to Consumer Compliance Outlook, a publication of the Philadelphia Federal Reserve. Errors that most often occur include the lender not including flood insurance premiums in the total for the monthly escrow payments and miscalculating the borrower's initial escrow deposit and giving them too much or too little credit for a payment. These mistakes on the initial statement can lead to ongoing incorrect payments from the borrower, creating problems. For instance, a statement that does not include flood insurance premiums could lead to that cost being left off the monthly bill and the borrower not keeping up with required payments.
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