If you put down less than 35 percent on a home, it’s likely that your lender will require you to have an escrow for real estate taxes and insurance premiums. That’s because it’s in the lender’s interest to make sure your taxes and premiums get paid in full and on time.

An escrow works like this: The lender takes your annual property tax and insurance premium bills, divides by 12 and then bills you monthly for 1/12 of the total. The lender will charge you anywhere from $50 to $100 to set up the escrow, and then takes on the responsibility of paying your taxes and insurance premiums.

But the process doesn’t always work out like it should. And lenders sometimes take advantage of the consumer.

Here are three real examples of lenders and tax escrows that got out of control:

  1. Case of the FHA Borrower. Home buyers who use FHA loans typically have very little cash for a down payment and are often only just able to qualify for their homes. In other words, everything must be carefully budgeted so that all bills can get paid.

One recent FHA homeowner has found himself in a pickle, thanks to several miscalculations of his real estate tax escrow by his lender.

When his original lender resold his loan just after closing, the new lender recomputed his property taxes incorrectly. Instead of increasing the monthly installment, the lender decreased the payments owed, and took a year and a half to realize it had not been collecting enough to pay the taxes. The escrow was depleted by $3,000. The lender recomputed the taxes again, and asked the owners to pay $5,000 in cash.

The homeowner didn’t have that much money in cash. After negotiating, the lender agreed to increase the escrow payments over two years to make them more affordable for the homeowner. That sounds good, but the lender is in essence asking the homeowner to pay $1,800 per month when all he can afford is $1,300 per month.

Unfortunately, there aren’t many options available to the homeowner. If he sells the house, he’ll lose money since he has only lived there a short time. If he stays and doesn’t pay the escrow, he will ruin his credit and may lose his house in the end.

  1. Case of the Missing Funds. When the homeowner purchased her house, the lender asked her to put up an extra $1,000 into her tax escrow. The $1,000 was supposed to be earmarked to pay the next property tax bill. The homeowner sold the property a year later. A few months after the closing, she received a notice from the County Collector’s office saying that not all of the real estate property taxes had been paid during the past year.

Although she had put up the cash in escrow to pay the taxes, the lender hadn’t paid them, and now a penalty was being assessed. Somehow, neither the lender nor the title company noticed that there was a tax problem with the property before the sale closed. While the former homeowner isn’t responsible for the property tax problem, she wonders what happened to her $1,000.

  1. Lenders Selling Loans. Most lenders resell loans within days – sometimes within hours – of closing on the loan. Few lenders “portfolio” loans, that is, keep them within their own financial portfolio. In some places, the reselling craze is starting to cost home buyers money, sometimes a lot more money.

In counties where the real estate tax billing cycle is different from the norm (either the previous taxes are billed in the current year or the tax bills come in May and September, rather than January and July) lenders have learned to make some adjustments in order to make the reselling of a loan flow more easily.

For example, in some counties, even though the property taxes have not been billed – and can’t be paid until they are billed – lenders require title companies to “insure over” the tax bill on the lender’s title insurance policy. That means, the lender require the title company to issue a title policy as if the tax installment was already paid. If the tax installment doesn’t get paid, the title company is now responsible for making sure it does get paid.

Because the title company doesn’t want to risk having a homeowner not pay his or her property taxes, the title company in turn requires the buyer to pay up to 2.5 times the estimate of what the second installment of taxes might be and sign a letter obligating the borrower to pay any deficiency. So if the estimate for the second installment of taxes is $1,000, a home buyer might have to cough up an additional $2,500 at closing to fund the tax escrow.

To add insult to injury, the title company will often charge a fee of up to $150 to process the tax escrow. The borrower must pay this fee in addition to the $50 to $100 tax escrow fee the lender is charging for its real estate property tax and insurance escrow.

The borrower ends having to pay extra fee, and having to come to closing with hundreds or thousands of extra dollars, all because the lender wants to resell the loan as quickly as possible, at its convenience.

And lenders wonder why home buyers are fed up with the mortgage process.

Published: Aug 5, 1996