Do I Have to Make Escrow Payments If I'm in a CARES Act Forbearance?

The federal Coronavirus Aid, Relief, and Economic Security (CARES) Act allows a homeowner with a federally backed mortgage loan, regardless of delinquency status, experiencing a financial hardship due directly or indirectly to COVID-19, to get a forbearance for as long as 360 days.

During the forbearance period, principal and interest are deferred, and no fees, penalties, or interest beyond the regularly scheduled amounts will accrue on the borrower's account. But the CARES Act doesn't specify what happens to the portion of the payment that usually goes toward paying property taxes and homeowners' insurance if you have an escrow account.

Fortunately, based on federal law and standard servicing practices, your servicer will probably let you defer making payments for escrow items during the forbearance. If your taxes or insurance comes due during this time, the servicer will most likely advance money to pay those bills if the account doesn't have sufficient funds to pay the expense.

What Is an Escrow Account?

With some mortgage loans, the borrower has to pay the servicer a specific amount each month to cover property taxes and homeowners' insurance, which are called "escrow items." Sometimes escrow items also include private mortgage insurance and homeowners' association dues.

After receiving your monthly payment, which includes principal, interest, taxes, and insurance (PITI), the servicer puts the amounts for taxes and insurance into a designated account called an "escrow account" or "impound account."

How Much Can the Servicer Collect for Escrow?

Typically, the borrower pays approximately one-twelfth of the estimated annual cost of taxes and insurance each month. The servicer might also collect a cushion, ordinarily, two months' worth of escrow payments, to pay for unexpected cost increases.

What Is the Purpose of an Escrow Account?

The servicer pays for the escrow items on the borrower's behalf as the bills come due. Having an escrow account ensures that your taxes, insurance premiums, and the like, are paid on time and in full.

Can I Cancel My Mortgage Escrow Account?

By making payments into an escrow account, you're essentially giving an interest-free loan to the servicer. Generally, you won't get paid interest on money in an escrow account (although a few states require it).

For this reason, some people prefer to hold on to their money and pay the tax and insurance bills themselves. If you want to pay for these items on your own, you might be able to cancel your mortgage escrow account.

Who Pays the Escrowed Portion of the Mortgage Payment During a CARES Act Forbearance?

The CARES Act doesn't specify how servicers should handle the portion of mortgage payments that goes toward escrow items. A previous version of the law, however, required the servicer to pay or advance funds for escrow items in a timely manner during the forbearance period. Even though this requirement wasn't included in the final version of the CARES Act, Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA), generally governs how servicers should handle escrow accounts.

For instance, under certain circumstances, federal law requires the servicer to keep an existing insurance policy in place if the borrower has an escrow account from which the servicer pays the insurance bill—even if the servicer needs to advance funds to the borrower's escrow account.

Also, property tax liens almost always have priority over other liens, including mortgage liens. So, the servicer will commonly advance money to pay property taxes to prevent a tax sale.

Moreover, many servicers interpret the CARES Act as requiring forbearance for the escrowed part of borrowers' monthly payments, along with the principal and interest. Still, it's a good idea to verify with your servicer that you don't have to pay the escrow amounts during the forbearance.

You'll Eventually Have to Repay Deferred PITI

You'll eventually have to repay deferred escrow amounts and the principal and interest you skipped during the forbearance. Generally, loan servicing guidelines permit borrowers to get caught up with:

• a lump-sum payment (sometimes called a "reinstatement")
• a repayment plan
• a payment deferral program in which the lender defers repayment of the missed amounts until the end of the loan, or
• a loan modification in which the servicer adds the overdue amount to the mortgage balance.

Your options depend on which entity, such as Fannie Mae, Freddie Mac, VA, or FHA, owns or guarantees your mortgage loan.

What If I Don't Have an Escrow Account? Who Pays the Taxes and Insurance?

If your mortgage doesn't have an escrow account and you usually pay your insurance and taxes on your own, you should continue to make those payments.

Getting Help With Your Mortgage During the COVID-19 Crisis

Contact your loan servicer to get specific information about what kind of mortgage help is available in your circumstances or to get a CARES Act forbearance.

A local foreclosure lawyer can advise you about your legal rights under federal mortgage servicing laws and tell you about state foreclosure laws. A HUD-approved housing counselor can provide you with helpful information (at no cost) about different mortgage-relief options.