Escrow Shortage Spread issues.

I have been reading all the post and was concerned as well due to an escrow shortage of $3650. This amount made my morgage loan go up by $500 a month. That's a big difference in a short time frame. I called my homeower's insurance to confirm the amount that I was paying. That had minimally increased (due to the increase in property value), understandable. So, my next call was to my county treasurer's office to check on my real estate taxes. Due to my home being new construction, they did not get my escrow amount correct initially...they were guessing. While they were guessing, my property was being assessed as a lot only. After living there for a few yrs they finially assessed my home at the correct value, not the lot only. So in essence, my escrow account had a significant shortage. Now I'm paying for it....yikes! :shock:

that's a tough situation to find yourself in, caramel, but you should have been alerted a long time ago. if your loan officer didn't suggest this would happen, then the realtor and/or builder you dealt with should have mentioned it. if they all didn't say anything, then the lawyer who closed your loan ought to have brought it up.

anyone buying new construction will often have this happen, though i didn't. my house was completed in august of 2005; we moved in, and an assessor showed up at our front door about 5 minutes later (it seemed). actually, it was within a few weeks, but that's unusual. usually towns, cities, etc. don't reassess that quickly, and that's why your initial escrow was set up so low. but they should have known better!

you have no recourse, either, i'm afraid. i hope you're not overly strapped with this new monthly payment.

Exactly, a good loan officer will make a reasonable attempt to calculate what your taxes SHOULD be. But this is one of those items that's occasionally overlooked. The other thing that can happen with new construction is that it does get addressed, but the borrower elects to purposely pay their escrow based on the current assessment and then conveniently forgets that conversation.

In regards to whether or not it's better to pay the shortage now or pay it in the payment, from a purely mathematical standpoint, you typically will save money by leaving the shortage in place. The servicer effectively winds up giving you an interest free loan for the shortage, and you keep that money in the bank, earning a whopping 2% (if you're lucky).

While servicers don't pay you interest on your escrow balance or any overfunding, they also don't charge you interest on escrow shortages.

This is part of the reason that you're typically charged an escrow waiver fee if you don't want to have escrows. The servicer makes a marginal profit on the float of the amount of money in your escrow amount, so they charge you to make up for that loss.

wow! 2% on deposits?? can i move my money to your bank, howard? oh wait...i don't have any money anymore...DRAT!

Hello,

I ended up with a HUGE escrow shortage last year. I was aware that my payments would increase on my new construction home once it was assessed., so I was expecting a $550 increase to my mortgage.

However, and unfortunately for me, with taxes paid in arrears here (IL), my builder went out of business and stuck me with a prior years' tax bill (HUGE amt) since my home had been vacant the previous year.

I then ended up with a total of $1,600 increase to my mortgage monthly! I was able to get the bank to spread the amount over 3 years which helped significantly - payment then was only increased by about $1,000 (still WOW).

Now it's not quite a year later and they've redone my escrow again. It's like they've completely forgotten about the 3 year spread I requested. They've readjusted everything again based on me paying off the shortage in a year. My payments have increase another $200.

My question is this: If I were to just suck it up and pay off the shortage (somewhere between $5,000-$7,100), will the banks be able to readjust my payments right away? Or would I still have to wait till year end when they do the recalculations?

I may just go ahead and make the extra payments this year and be done with it. It really sucks though.

quite an ordeal, lani. i don't get why you were stuck with the builder's taxes, but that's probably another whole ordeal in itself.

did the lender give you the option of paying the shortage in one fell swoop? that's not a bad idea, given that you undoubtedly have the wherewithal to do so.

I got stuck with the builder's taxes b/c they went bankrupt or out of business. The taxes are billed in arrears so I was billed for 2007 taxes even though I didn't move into the home until 2008. (The home was built in 2007 but was vacant until I moved in.) The builder had in the contract that they'd pay the taxes when they came due but since they went out of business, I never got the money (not for a lack of trying).

I'm thinking of just dealing with the super high payment for the year.

unreal...that builder should have had the taxes paid upon conveyance to you. have you had any discussions with your lawyer in this regard? that might be helpful - i hope so anyway.

Yep, I talked to the lawyer who helped close my home and also a new lawyer who was helping other buyers in the same situation. The taxes were not included in the sale contract b/c since it was a new build - taxes had not yet been assessed. Yes, it pretty much sucks. Not like anyone has an extra $8,000 lying around. Taxes are expensive in my area.

Thanks for your replies. :)

okay...but the $8000 was how the municipality taxed the property once it was complete; that means that the taxes are truly yours, and not the builder's responsibility. it's not really the builder's taxes you are paying; they are yours.

Actually, no, they weren't my taxes.

The tax bill was for 2007. I did not purchase the home until April 2008. They bill taxes in arrears. So, they put in the contract that the builder would pay the taxes when they came due in 2008. In October 2008, the tax bill came - the land was finally assessed and the tax bill was for the year 2007. I did not live in the home. It was owed by the builder. The home had been built but sitting vacantly. Typically, they put a credit for the taxes in the sales contract for what they expect the taxes to be - on non-new home. But since it was a new construction, I did not have a credit for the prior years' taxes. Instead, I had an addendum that the builder would pay the taxes once they came due and knew the amount owed.

Does that make sense now? It was never a question of whether the builder owed or not. They fully accepted that they did owe it (as it was part of the contract) but they suffered financially and did not pay - unfortunate for me. My lesson is to never buy a new construction home that's been sitting for a year in a town that assesses taxes a year later. Too much of a risk.

the lightbulb just went off. your last line told me the real story. so the home was actually complete a year earlier than you bought it, eh? that's why the tax bill due was so high...i get it now.

and i also get why you got stuck - because your builder went belly-up and you either absorb the taxes or lose the deal on the house.

i'm glad you included that last line.

We just refinanced in Oct 2009. It looks like they collected 2 months of taxes at closing which puts us with an escrow shortagage of almost $2,000. Who's responsibilty is it to collect the right amount so this doesn't happen? Is there any legal action?

This is one of the reasons many people can't pay their mortgage and the foreclosure problems are what they are!!! Either the mortgage broker or the lawyer at the title company should be responsbile for letting the buyer know this will happen. All the paper work included to close on your loan confuses anyone that doesn't work in this field.

Is there anything I can do?

Hi LAvery,

The lender will let you know the the right amount that you need to pay towards your escrow account. You may take legal actions but you'll have to contact an attorney and take his opinion in this regard. He would be the right person to let you know whether or not you would be able to file a lawsuit against the lender.

it's unfortunate that you've got a shortage in your escrow account, but i don't see any possibility of legal action being effective. did you get a refund of your prior escrow account from the previous lender? did they net that amount against what you owed on the mortgage when you paid it off, or did they send you a check separately. that's probably where the discrepancy came into play.

i agree that your new lender should have been aware of the need to retain sufficient funds so that you'd not be short, but there was, apparently, some confusion on that end.

unfortunately, again, i don't see a lawsuit as a remedy.