What is an Escrow Account

An Escrow account is a trust account where funds are held by a third party and the funds are disbursed after a transaction is complete. In a Mortgage, an Escrow Account is managed by a Mortgage Servicer. The Mortgage Servicer deposits a portion of the monthly payment into the Escrow Account to cover the estimated Property Taxes and the Homeowners/Mortgage Insurance Premiums. The monthly payment to the Servicer from the Borrower includes Principal, Interest, Insurance and Taxes. A Portion of the monthly payment is held by the Servicer to pay for future Taxes and Insurance when they become due. 

Escrow Accounts protect both the buyer and seller throughout the term of the mortgage and during the home buying process. Instead of paying Taxes directly to the government or Insurance Premiums to the Insurance company, the borrower pays toward these expenses each month as part of the mortgage payment and the funds are held in an Escrow Account. 

Generally, an Escrow Account is a Prerequisite if the buyer of a home does not put at least 20% down payment towards the purchase of the house. Escrow accounts helps the buyer to budget and pay for estimated Insurance and Taxes on a monthly basis rather than paying the entire amount in one lump sum annually. It also protects the Lender by insuring the Home Insurance is maintained on the collateral property to cover any losses or the government placing a Lien on the Collateral Property for non-payment of taxes.  

FHA Loans require an Escrow account. The account is used to pay Property Taxes, Homeowners Insurance and Mortgage Insurance Premiums (MIPs) regardless of the down payment towards the purchase of the Property.

Related Topics:          Truth in Lending Disclosure (TIL)                   The Loan Estimate (LE)                The Closing Disclsoure (CD)               Good Faith Estimate (GFE)               What is Private Mortgage Insurance and the Purpose? What are the Benefits of private mortgage insurance? Explain Facts on private mortgage insurance and ratios?                   What are Jumbo Loans?            Conventional Loans           FHA Loans             VA Loans             USDA Loans          An Adjustable Rate Mortgage             A Fixed Rate Mortgage            Construction Loans             Graduated Payment Loans               What is a Mortgage Servicer?                What is Hazard/Homeowner Insurance? What is  Forced-placed insurance?                 What are Hazard insurance requirements?                How is Hazard insurance collected?                


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