State of Illinois Mortgage Escrow Regulations

For many homeowners who make monthly mortgage payments, it is easier to escrow their property taxes. When borrowers escrow, they send a portion of their real estate taxes (usually one-twelfth), along with a twelfth of their annual property insurance payment to their lenders with each monthly mortgage payment. When the bills are due, the lender uses money in the escrow accounts to pay the city or county taxes and the insurance company. While the concept of escrowing for property taxes is the same across the country, most states have specific laws stating how each escrow account must be handled. In Illinois, the laws are set forth under the state Escrow Account Act of 1978.

  1. Lender Requirements

    • In Illinois, when borrowers send partial real estate tax payments to their lenders, funds are required to be held in an escrow account and are not permitted to be used for any other purpose. Lenders must agree to keep borrower payments in the escrow accounts and pay real estate taxes when they are due according to each tax bill they receive.

    Borrower Requirements

    • According to the Illinois Escrow Account Act, borrowers must send their lender one-twelfth of the total amount of their real estate taxes. When there is not enough to cover tax bills when they are due, lenders must notify borrowers of deficiencies and shortfalls must be brought current by each homeowner. This is common when monthly escrow payments follow increases in property taxes.

    Cancelling Escrow Accounts

    • In Illinois, an escrowing borrower may cancel their escrow account when a mortgage has been decreased by 65 percent of its original principal amount. When this occurs, borrowers are responsible for paying their own real estate taxes when they come due. If the borrowers fail to pay taxes when they are due after an escrow account has been cancelled, lenders have the right to reinstate the original account. This sometimes results in escrow payment increases until accounts are replenished.

    Interest Bearing Savings Accounts

    • Depending on the guidelines of each lender, borrowers are given an option, at the time they file a loan application, to open an interest-bearing savings account or other account to be used for payment of real estate taxes. When this occurs and the borrowers wish to escrow later, they may do so. However, this often comes with initial deposit requirements and/or an increase in monthly tax installments.

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