Definition of Mortgage Escrow

Mortgage escrow accounts are a type of savings accounts set up by lenders. In cases where a lender's collateral is lost, escrow accounts help ensure the lender does not lose out on his investment. Collateral is the building or property being bought or sold. Disasters like fires, earthquakes and foreclosures due to unpaid taxes are ways that lenders can lose collateral.

Escrow Amounts

The amount of money in a mortgage escrow account is an estimate for the upcoming year. Property taxes and insurance premiums amounts are averaged together to help determine the amount of money placed in escrow.

Escrow Cushion

Each mortgage escrow account may be required by the lender to have a cushion or extra money. The Real Estate Settlement Procedures Act (RESPA) limits mortgage escrow cushions to one-sixth of the total amount of items paid. That amount is often equal to 2 month's worth of tax and insurance payments.

RESPA

RESPA is how the U.S. Department of Housing and Urban Development (HUD) governs escrow accounting procedures. RESPA stops lenders from taking advantage of borrowers by limiting the amounts that lenders can put into each individual escrow account.

Reviewed Annually

Each mortgage escrow account is reviewed annually by the lender. Lenders must notify borrowers of shortages or excesses to their escrow accounts. Excesses of more than $50 must be returned to the borrower. Escrow shortages are usually repaid over the next 12 months.

Not Mandatory

Mortgage escrow accounts are not made mandatory by all lenders. However, certain government loans, loan programs and lending institutions require escrow accounts. FHA and VA loans are two types of loans where mortgage escrow accounts are required.