What Is an Escrow Analysis?

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While escrow isn't necessarily a complicated topic, most of us don't actually need to have escrow explained until it's time to close on a home for the first time. There are also parts of the escrow process that may be confusing. For example, are you at the point in your buying journey where you're ready to begin understanding escrow analysis? Let’s start with “what is an escrow analysis?” An escrow analysis is a periodic audit of a borrower's escrow receipts. The purpose is to ensure that your monthly payments are adequate for covering all taxes and insurance tied to your mortgage.

Escrow analysis is important because a borrower could end up with a shortage of funds if the bills covered by an escrow account exceed the available funds in the account. While your monthly mortgage total will remain the same throughout your loan term if you have a fixed-rate mortgage, taxes and insurance can fluctuate over time. The routine analysis conducted by lenders prevents this problem. Here's what to expect.

What Is an Escrow Account?

Most lenders require borrowers to set up escrow accounts as part of the closing process. This account is managed by the lender. An escrow account provides a place where monthly loan payments can be deposited. For the borrower, escrow provides the ease of being able to send mortgage payments, insurance premiums, and tax payments to one place instead of managing separate payment schedules. After applying the appropriate amount of money to your mortgage principal and interest, your lender will direct the rest of the funds to the appropriate third parties before your tax and insurance bills are due.

A mortgage escrow account is established by your lender once you close on a home. One tip for a first-time homebuyer is that this type of escrow should not be confused with the escrow used to make an earnest money deposit to the seller after making an offer on a home. That is a completely separate account that is not related to your mortgage escrow account.

Understanding the Escrow Analysis Statement

An escrow analysis shouldn't be thought of as something mysterious for borrowers. Typically, a lender will send out an escrow analysis statement annually to show you where your account stands. Here's some information that might be included:

Summary: It's common for a statement to have a summary for the upcoming year that shows the accounts balance going into the next period.
Changes: This portion highlights differences between previous payments and updated payments.
History: This portion summarizes the account's activity for the year to showcase how much money went into escrow versus the amount paid out by the account.
Projections: Using the most recent information combined with data from the previous year, this section provides projections for how much will be paid through escrow for the upcoming year.

When is escrow analysis done? It's standard for escrow to be analyzed once a year. When setting up an escrow account, lenders calculate what borrowers owe for the year in taxes and insurance premiums per month by dividing totals by 12. Some lenders require cushions that will cover unexpected tax increases. If the amount collected for escrow is higher than the actual total, the excess balance will either be refunded or credited to the borrower.

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The Process of Escrow Analysis

Escrow analysis is an automatic process that is conducted annually for each escrow account held by a mortgage company. It functions a bit like an audit. The main role of the lender is to weigh projected escrow payments against actual escrow payments to see if there are any deficits or surpluses. An analysis might weigh the following together:

Projected Payments: The payment totals scheduled to be made for each month of the year.
Actual Payments: The payment totals deposited into your escrow account.

Projected Disbursements: Funds projected to be paid out of your escrow based on anticipated property taxes and insurance premiums.
Actual Disbursements: Funds paid out of the escrow account to cover property taxes and insurance premiums.

Projected Escrow Balance: Funds projected to be available at the end of each month based on the projected payments and disbursements covered above.
Actual Escrow Balance: Funds present in the account at the end of each month based on actual payments and disbursements.

Aside from the main role of tracking and assessing balances, a lender's other core role in the escrow analysis process is to be accurate. Keep in mind that your lender does not set the amount owed for property tax or insurance premiums.

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How to Read and Understand Your Escrow Analysis Statement

An escrow analysis should be pretty straightforward. If you need clarification regarding how to interpret various sections, your mortgage company should be able to walk you through how they arrived at the totals. Becoming familiar with some commonly used terms in escrow analysis can also be helpful. Here are some terms you might see on your analysis report:

Minimum Escrow Account Balance

Mortgage companies often require a minimum account balance for escrow to ensure that you have sufficient funds to cover your bills. The minimum balance will be included in your closing documents. While it's common for lenders to require up to two months of payment, minimums vary by state and lender.

Escrow Surplus

If your analysis reveals that your escrow account balance exceeds your required minimum balance, this may qualify as a surplus. Lenders have different ways of handling surpluses. Some provide credits or reimbursements.

Escrow Shortage

If your analysis reveals that the funds in your escrow account are below your required minimum balance, this can qualify as a shortage. Lenders will generally adjust monthly payments to make up for shortages over the span of 12 months. A lender may require a borrower to pay a lump sum to correct the escrow balance.

Common Adjustments in Escrow Analysis

Adjustments are fairly common in escrow analysis. Homeowners can expect escrow payments to change whenever their property taxes and insurance premiums change. Keep in mind that increased home value can cause property taxes to go up.

Your monthly escrow total can also be adjusted down. If you make improvements to your home, it's possible that your homeowner insurance premiums could be reduced. Additionally, your monthly mortgage payment can decrease if you reach the threshold where the requirement for carrying mortgage insurance with your loan is met.

A happy Black couple looks over their financial notes

How to Prepare for Escrow Analysis

One of the major benefits of escrow is that it removes the burden of submitting individual payments for property taxes and home insurance. While escrow does remove some of the load of budgeting from a borrower's shoulders, borrowers should still be positioned to be able to manage rate increases. You can avoid surprises by staying informed about changes and increases in local property taxes before they happen. Additionally, staying informed about changes to your premium each year can help you to avoid unexpected hikes. Homeowners should be proactive about altering their household budgets to align with cost-of-living increases that impact both property taxes and insurance premiums.

For the homeowner, there isn't necessarily any need to gather special documents to prepare to receive an escrow analysis. The analysis summary itself provides all relevant data. However, you can consider getting property tax and premium records in front of you in order to compare the analysis to your own records.

What to Do If You Disagree with Your Escrow Analysis

If you believe there's a discrepancy, contact your mortgage servicer right away to file a complaint. Providing documentation of your payments can be helpful for clearing up confusion. If your escrow total has increased, one way to potentially lower your mortgage cost is to shop around for a new insurance company that charges lower premiums for similar coverage.

FAQs on Escrow Analysis

How often can a mortgage company do an escrow analysis?

While lenders must comply with state laws regarding how frequently analysis can be conducted, most lenders perform escrow analysis once a year.

What happens if there's a surplus or deficit in my account?

In the case of a surplus, a lender will generally offer a refund or credit the funds to the borrower. Each lender has its own standards for how far over the minimum balance an account must be to trigger a surplus notice. If there's a shortage that puts an escrow account in danger of falling below the minimum required balance, a lender is likely to automatically adjust the monthly payment to be able to make up the shortage amount over the next 12 months.