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Real Estate Settlement Procedures Act (RESPA)
Calculate Escrow Account Maximum Limits

 

The steps in the following example will help you estimate the maximum amount of money your lender may require you to have in your escrow account (either a new or existing account, under aggregate accounting). RESPA limits this amount by law, for the borrower's protection.

  1. List all the payment amounts and dates for items that will be paid out from your escrow account for the next 12 months. In the example below, taxes of $500 are to be paid in July and taxes of $700 are to be paid in December; and hazard insurance of $360 is to be paid in September. If you have a payment like flood insurance, which is paid every 3 years, you must project a running balance over that 3-year period.
  2. Divide this total amount by 12 monthly payments (in this example, $1560 divided by 12 = $130).
  3. Create a running monthly balance for the next 12 months including all payments to the escrow account (in this example, $130 per month) and all payments out of the account.
  4. Increase all the monthly balances to bring the lowest point in the account (in this example, December is lowest, with a negative $780) up to 0.
       
  Payments
to Escrow
Payments
from Escrow
Balance
(#3 above)
Balance
(#4 above)
Jun - - 0 780
Jul 130 500 -370 410
Aug 130 0 -240 540
Sep 130 360 -470 310
Oct 130 0 -340 440
Nov 130 0 -210 570
Dec 130 700 * -780 * 0
Jan 130 0 -650 130
Feb 130 0 -520 260
Mar 130 0 -390 390
Apr 130 0 -260 520
May 130 0 -130 650
Jun 130 0 0 780

 

  1. Add any cushion your lender requires to the monthly balances. The cushion may be a maximum of 1/6 of the total escrow charges (1/6 of $1560 = $260).
  Payments
to Escrow
Payments
from Escrow
Balance
with Cushion
Jun - - 1040
Jul 130 500 670
Aug 130 0 800
Sep 130 360 570
Oct 130 0 700
Nov 130 0 830
DEC 130 700 * 260
Jan 130 0 390
Feb 130 0 520
Mar 130 0 650
APR 130 300 780
May 130 0 910
Jun 130 0 1040

In this example, $1040 is the maximum amount the lender should require in the account. The account should fall to the cushion at least once during the year. In this example, it is in December ($260).

New Accounts -- In this example, if you settled May 15, and the first payment was due in July, $1040 would be the maximum amount you should be required to place in an escrow account. If your lender requires less than the maximum cushion, the amount would be less.

Existing Aggregate Accounts -- In this example, during escrow analysis, the lender would compare the required amount of $1040 to the actual balance in your account in June. For example:

  • If your balance is $1076, there is a surplus of $36. Your lender may choose to apply any surplus less than $50 to future payments, reducing your monthly escrow payment to $127, or may choose to return the surplus to you.
  • If your balance is $1090, there is a surplus of $50. The lender must return any surplus of $50 or more to you within 30 days of the analysis.
  • If your balance was $940, there is a shortage of $100. This amount is less than one month's escrow payment and the lender may ask you to pay this amount within 30 day or may spread it out over a year.
  • If your balance was $800, there is a shortage of $240. The lender must spread the collection over at least 12 months. If the lender spreads the shortage over 12 months, your monthly escrow payment would increase to $150.
  • If you have a deficiency in your account (where the lender has to use his own funds to pay a bill), you may have to reimburse the lender sooner than over 12 months. If the deficiency is less than one monthly escrow payment, you may have to repay the lender in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the lender may require you to repay the amount over 2-12 months.
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