It is April 1st, and your mortgage payment took a jump. You forgot about calling to inquire about the disclosure you received in the mail over a month ago that was supposed to make it clear as mud why your payment was going up. No worries, the mortgage servicing department is your resource to answer those questions, while walking you through those confusing disclosures.
Let us back up to the day you purchased your home, and what you were told your mortgage payment was going to be. When you escrow that payment, it is going to change from year to year based on what you owe annually in taxes and insurance. Every year the Service Department must re-analyze your escrow account to accommodate where it may be short and adjust to what will need to be collected in the future. If only it were as simple as taking the amount due in the upcoming year by twelve months, but this is not the case. The loan servicing staff must address shortages and deficiencies in addition to collecting what we need for the next 12 months. I understand this can be very confusing, so let me try to break it down based on deficiency, shortage, and what is to be paid out in the future.
Let me start with a deficiency in the escrow account balance. A deficiency is when your escrow account balance starts with a negative balance at the time the annual disclosure is run. The deficiency will show up separately from the shortage and you can choose to pay it in full or pay it monthly with your regular taxes and insurance payment. Example your starting escrow balance is a negative $236.32. If you divide $236.32 by twelve, the amount would be $19.69. If you chose to pay it monthly, this amount would be included in your monthly taxes and insurance payment.
Now onto a shortage, where that amount comes from, and how it is collected for on the annual escrow disclosure. There is, what is called, the low point in the escrow balance. That low point is not to go below a two-month cushion of what is collected monthly for your taxes and insurance payment. Example your monthly payment is $400 and at one point your projected balance is $200. Since the balance went $600 below the $800 required two-month cushion, there will be a shortage of $600. On the annual disclosure it will show as dividing the $600 by twelve months which would be $50. You could pay the $600 or the $50 could be collected monthly for 12 months in your regular monthly taxes and insurance payment.
And lastly, we must collect for the taxes, insurance, Private Mortgage Insurance (PMI) and Rural Development (RD) fees for the loans that have them. Let us break it down; taxes $100, insurance $100, PMI $100 and RD fee $100 for a total of $400. Then take it times twelve for a grand total of $4800. The $4800 is the total for the year that will be paying out for the tax, insurance, PMI and RD fees. Not all loans have PMI or RD fees, but for the example I will include them for those who do. This is where you divide the $4800 by twelve to get $400 which is the regular portion of the taxes and insurance payment minus any deficiency or shortage portion of the payment.
These three parts make up a taxes and insurance payment. However, keep in mind you might not always have a deficiency and a shortage, you might just have a shortage. The total escrow payment, if you add up the examples would be $469.69. If you would choose to pay the deficiency and shortage your escrow payment would be $400.00. Common reasons why you end up with deficiencies and shortages are due to switching insurance and not submitting the refund you got from your previous insurance carrier. Therefore, insurance was paid out twice, but only collected to pay it out once. Another reason would be your insurance went up and there was not enough collected. Unfortunately, insurance does go up, but collection is based on current amounts only. The service department is not able to over collect in an escrow account, but you can add extra to your escrow account at any time. Since the servicing department cannot arbitrarily increase the amount and over collect, it is recommended that people who build a new home put extra in their escrow. It is inevitable taxes are going to go up based on the fact you are going from paying on an empty lot to paying for the house on the lot. This will likely cause a significant increase, which will have a significant impact on the escrow account. If your taxes and insurance, go down you might end up with a surplus in your escrow and if that surplus is over $50.00 you will receive a check with your annual disclosures. If you chose to, you could have us redeposit the surplus into your escrow account in the event your taxes and insurance go up the following year.
Escrow can be confusing, but your local Dakotaland Servicing staff are here to help you with all your escrow questions. We appreciate your trust in letting us handle your mortgage servicing needs and thank you for choosing to keep your mortgage business local at Dakotaland Federal Credit Union.
