Escrow Surplus– All Questions Answered
December 7th, 2022
An escrow surplus occurs when you have more money in your escrow account than needed. So how does that happen? An escrow account makes payments for your property tax and homeowners insurance more secure and easier to manage.
However, the law limits the amount your mortgage servicer can require you to keep there. Anything above that escrow limit is a surplus, and the company must refund it. We will tell you more about how it is calculated, your obligations, and how you become eligible for that escrow surplus check.
Annual Escrow Analysis - What Is It and How It Affect You
A mortgage servicer requires a homeowner to make a monthly payment equivalent to one-twelfth of the projected amount necessary to pay taxes, insurance, and other expenses for the next 12 months. The company can also require an amount equal to two months of payments as a security cushion
This is often included in the monthly mortgage payment, but it can depend on the lender. Take note that regulations and practices are sometimes different. California escrow requirements show that in practice, even though homeowner's insurance isn't mandatory by law, it's required by mortgage lenders until the loan is paid off.
The Real Estate Settlement Procedures Act (RESPA) requires mortgage services to review clients' accounts once a year. They will analyze the activity in the past 12 months and make an estimate for the following 12-month period.
This process aims to ensure you have enough money to cover your taxes, insurance premiums, and other expenses. You will get a summary statement with escrow surplus and shortage notifications.
What Is an Escrow Shortage?
This implies that your escrow account doesn’t have sufficient funds for property taxes and insurance payments. The most common reasons are:
- An unforeseen increase in your property taxes or insurance.
- Change in the insurance company’s billing cycle.
- Payments were made earlier than usual because of the taxing authorities’ discounts for early payments.
Of course, if the escrow analysis shows you owe money, you must make an escrow shortage payment.
What Is an Escrow Surplus?
A surplus happens when the escrow analysis shows the amount surpasses the estimated amount required to cover the disbursements expected for the rest of the escrow year.
According to federal regulations, section 1024.17(f), mortgage servicers must reimburse their clients. They have two options, depending on the escrow surplus amount:
- $50 or more: the company should refund the client within 30 days. Of course, there is no limit to the amount of money you can get. It is your money, after all.
- Less than $50: the company should either refund the client within 30 days or credit it to the next escrow year.
However, the sum is not important when you pay off your mortgage - you will get a refund of any leftover funds.
Does Escrow Surplus Refund Require Your Involvement?
The process doesn’t require your involvement, as mortgage services conduct analyses of different types of escrow accounts at least once a year (some more often). If you believe you’ve overpaid, you are entitled under RESPA to request that surplus back from your mortgage servicer. If you are not in a hurry, you can wait a few months for that check.
What’s an Escrow Surplus Check?
If your mortgage service company finds that you have a surplus on your escrow account, it must give you a refund. If the amount is lower than $50, it will probably be credited to your next escrow year. However, you will get a check if the extra money on your account exceeds $50.
Escrow Surplus and Taxes
Many mortgage takers wonder if they should report escrow refunds on their tax returns. The answer is - no. It is not considered income, just a refund of your money.
But, are funds in escrow deductible, considering they are used to pay property taxes, which is a deductible category? Well, only the amount actually used and transferred to the taxation authority is considered deductible.
If you want to ensure that your tax and insurance obligations are paid in time and that any surplus is refunded in time, let Lightspeed Escrow manage your account. We are a team of skilled professionals on a mission to remove the inconveniences in the real estate world.
Escrow Surplus - FAQ
What Is An Escrow Balance Refund?
After you pay off the mortgage, you are entitled to any money left in your escrow account. It is similar to an escrow refund, but you get the entire amount instead of a portion the company deems surplus.
The lender will ensure there is enough to cover the upcoming property tax bill and homeowners insurance premium, and you will receive the rest of the money within 20 days.
What Are Escrow Refund Checks?
Mortgage service companies are required by law to conduct escrow account analysis at least once a year. The company examines payments in the previous escrow year and makes estimates for the following year
If the analysis shows a surplus, the Real Estate Settlement Procedures Act (RESPA) requires them to refund that money. If it is less than $50, it will be credited to the following year. If the escrow surplus exceeds $50, the client will receive a check within 30 days.
