A couple of months ago, I took out a mortgage to buy my own place. My loan is escrowed. So, as I understand it, the lender has to make the homeowners' insurance and property tax payments.
I just heard that lenders are sometimes late when paying these bills. What happens if my lender doesn't make the payments on time? Is that likely to happen?
Keeping the homeowners' insurance and property taxes paid up is in your interest and your lender's best interest. So, mortgage servicers rarely forget to make escrow disbursements.
Still, mistakes occasionally happen. Learn your rights and how to protect yourself if the servicer fails to make these payments.
If you get a mortgage loan to purchase a home, the lender could require you or let you select to have an escrow account. With a mortgage escrow account, you must pay the servicer a certain amount each month to cover "escrow items." This term includes property taxes, homeowners' insurance, and, in some cases, private mortgage insurance and homeowners' association dues.
The lender puts the extra amount you pay each month, along with principal and interest, into a designated account called an "escrow account." Bills for the escrow items go to the servicer, rather than to you. So, the servicer pays for the escrow items when it receives the invoices. These payments are called "escrow disbursements."
A house in good condition because insurance money was available to fix damage after a fire or other casualty brings in more money at a foreclosure sale than one in disrepair. So, the idea behind having an escrow account to pay for homeowners' insurance is to protect the lender from the chance that you won't pay for an insurance policy on your own.
Most mortgage contracts have a clause requiring the borrower to have sufficient homeowners' insurance. If coverage lapses, the servicer can order an insurance policy and pass the charges along to you. This kind of insurance is called "force-placed" or "lender-placed" insurance. The insurance covers damage to the home. But, unlike a regular homeowners' insurance policy, it doesn't cover your personal belongings.
Because not having insurance on the property violates the mortgage terms, the servicer can foreclose on the home if you don't pay for your own policy or reimburse the lender after it obtains lender-placed insurance.
Property tax liens get priority over other kinds of liens, including mortgages. So, the mortgage will be eliminated if the home is sold at a tax sale.
Because a mortgage is vulnerable to being wiped out in a tax sale, the servicer (on the lender's behalf) wants to make sure that property taxes get paid. One way to ensure this happens is to require an escrow account.
The servicer must make the insurance and tax payments on or before the deadline to avoid a penalty, as long as your mortgage payment isn't more than 30 days overdue. (12 C.F.R. § 1024.17.)
Even if you don't have enough funds in your escrow account to cover the disbursements, the servicer usually must advance funds to make the payments.
Most servicers are pretty good about paying insurance and property tax bills promptly. But escrow disbursement errors can happen.
If your servicer doesn't make an escrow disbursement on time, contact the servicer and ask it to make the payment immediately. If this step doesn't remedy the problem, send your mortgage servicer a copy of the bill and a "notice of error," (a letter describing the mistake).
In the letter, be sure to include the following:
You need to send a separate letter, not a note on your payment coupon.
Be sure you send it to the proper address. Check your monthly mortgage statement, coupon book, or the servicer's website for the address to use for notices of errors. You can also call your servicer to get the address.
Under federal law, the servicer must acknowledge receipt of the notice of error within five business days. (12 C.F.R. § 1024.35.)
If it turns out that the servicer did forget to make the insurance or tax disbursements, it must correct the error within:
It also has to cover the cost of any penalties imposed due to the late disbursement. (12 C.F.R. § 1024.35).
If you get a notice that your insurance or property tax payment is late, contact the servicer and ask it to make the payment immediately. And, again, send a notice of error to the servicer if contacting the servicer doesn't fix the issue.
Depending on the circumstances, you should also contact your insurance carrier or tax authority as soon as possible.
Remember, you might have to deal with uninsured damage if the servicer neglects to pay the insurance premiums. Or if the property taxes aren't paid, the taxing authority could get a lien on your home, and you might eventually lose the place to a tax sale.
In a desperate situation, you might consider paying the bill yourself and sorting the mess out with the servicer later.
Another reason your mortgage company might require an escrow account is to make sure that money is available to pay the escrow disbursements, even if you're sometimes late making payments. In fact, most servicers collect an escrow cushion, typically two months' worth of escrow payments, to pay for unexpected increases or costs.
If make don't make your mortgage payments on time, the late payments will damage your credit. If you fall far enough behind, usually 120 days, the servicer can start a foreclosure.
To avoid making late payments, you could:
If your servicer fails to make escrow disbursements even after you notify them of the problem, you might want to talk to a lawyer.
Also, if you're having trouble making your mortgage payments, consider different options and contact your servicer as soon as possible. You can talk to a HUD-approved housing counselor, who will help you for free, to learn about foreclosure alternatives.
You might also consider talking to a foreclosure attorney to learn more about your state's foreclosure procedures and what you should do in your situation.