The escrow account analysis: reading your yearly escrow statement

What the analysis does

Federal rules under Regulation X, at 12 CFR 1024.17, define the escrow analysis. The servicer projects the account month by month for the coming year, called a trial running balance, to:

• set the target balance each month, enough to pay the bills as they come due plus any allowed cushion;
• work out your monthly escrow payment for the next year; and
• find out whether the account has a shortage, a surplus or a deficiency.

The escrow account computation year is the 12-month period the servicer uses, starting from your first payment date. The servicer must send the annual statement within 30 calendar days of the end of that year.

The cushion

A servicer may hold a cushion to cover unexpected bills or bills due before your payments have built up. Regulation X caps it at one-sixth of the estimated total yearly payments from the account, about two months' worth. Your loan documents or state law may set a lower cushion or none.

The cushion is one reason the escrow part of your payment can be higher than one-twelfth of your bills.

Surpluses, shortages and deficiencies

Surplus. The account will hold more than the target. If the surplus is $50 or more, and you are current, the servicer must refund it within 30 days of the analysis. If it is under $50, the servicer may refund it or credit it against next year's payments. You count as current if the servicer receives your payments within 30 days of their due dates.

Shortage. The account will hold less than the target at its low point. The servicer may let it stand or collect it under limits that depend on its size. The escrow shortage guide covers this in detail.

Deficiency. The account has a negative balance because the servicer advanced money to pay a bill. The servicer must do an analysis before seeking repayment.

How to check your statement

Compare payments made. Each tax and insurance disbursement should match your bills. A missed or duplicated payment is a real error.

Check projections. Next year's estimates should come from current tax notices and your policy renewal. If you appealed your assessment or changed insurers, tell the servicer.

Check the cushion. It should be no more than one-sixth of yearly bills.

Look for a refund. If there is a surplus of $50 or more and you are current, a check should follow within 30 days.

If something looks wrong, write to your servicer, describe the error and keep a copy. Federal rules give borrowers ways to dispute servicing errors, and a clear written request is the best start.

The bottom line

The yearly escrow analysis resets the escrow part of your payment to match your tax and insurance bills, plus a cushion of no more than one-sixth. Read each statement, compare it with your bills and expect a refund when a surplus is $50 or more.