Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

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YesWeCan713
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Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by YesWeCan713 »

Hello Bogleheads,

My bank is asking for 5 months of property taxes and insurance on our closing. We've been reading that it is typically 2 months for both. We're at the Final Disclosure stage and this number just seems STAGGERING. Any advice?

Best,

YWC
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nps
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by nps »

Roll it into closing costs if you can't afford it? If you can afford it, the opportunity cost of three extra months in escrow is not likely to be much if anything.

Or ask your lender to waive escrow and pay it yourself.
livesoft
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by livesoft »

If the seller already paid in advance for the next 5 months of property taxes and insurance, then you are not going to get that for free. You gotta pay for it yourself.
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by jfn111 »

livesoft wrote: Sat Jul 04, 2020 7:27 am If the seller already paid in advance for the next 5 months of property taxes and insurance, then you are not going to get that for free. You gotta pay for it yourself.
Livesoft is correct. All of our RE contracts state that taxes will be prorated. If the seller, like me, pays the full year up front they need to be reimbursed.
dukeblue219
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by dukeblue219 »

Given that it's July, it sounds like the seller already paid for August - December. You'd have to pay it anyway....
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teen persuasion
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by teen persuasion »

Three extra months of escrow is STAGGERING? We paid off our mortgage years ago, but 3 months would have been about $1k for us, in NY. How high are your property taxes?


I don't know if this varies by state rules, but there was a minimum balance that our escrow had to maintain monthly, can't recall exactly the number but I seem to recall it was something like 5/12 the total of escrow paid bills. Every year they would readjust the escrow amount by figuring the new total (after getting annual new bills), dividing by 12, then projecting monthly balances with escrow pay-ins and property tax/insurance/school tax payouts at various times of the year. Every month had to stay above that minimum balance; if any month was projected to go below, the difference to bring it up needed to either be added upfront once a year, or was prorated over the upcoming year (increasing escrow). Conversely, if monthly balances were projected to be higher than needed, they sent us a check to correct it and might decrease escrow payments.

Unfortunately, the timing of these annual assessments was immediately before school taxes were billed, which led to an annual see-saw in escrow payments. The calculations started in August with current year paid property tax and insurance (January) but past year school school tax (October). When school taxes increased above past year's amount (used in the projection), the higher amount ate into the balance going forward. Which is why they build in that minimum balance rule, to compensate for unexpected increases. Next year's adjustment, the new higher total balance increased escrow payments, PLUS the amount to make up for the shortage, PLUS something to keep every month above the minimum (timing of payments drops it low in February, usually). Now we are sending more than needed to pay the actual bills, to maintain the minimum monthly. Fast forward another year, and we have an excess in escrow, and by law they have to refund it to us and they decrease the monthly escrow amount. But school taxes WILL increase next month (they just haven't seen the bill yet), and the cycle repeats.

If I could have moved the adjustment month, I could have smoothed out the escrow payments over time. If I could have given them an estimate of next year's tax bill (instead of relying on past bills) I could have smoothed them. If I could have rejected the decreased escrow payments (that I knew were too low), I could have smoothed them. But that wasn't how the system worked.

TL;DR:
There's a minimum you need to maintain in escrow every month, perhaps equal to 5 months escrow payments. This minimum protects against fluctuations in actual bills to prevent negative escrow balance. Be prepared for escrow payment fluctuations from year to year (if a 3 month escrow payment is STAGGERING).
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by Jack FFR1846 »

Are you putting at least 20% down? For the 3 houses I've bought, I always pay 20% down and have never had an escrow account, nor had to pay insurance or taxes in advance. I have had to have an insurance binder at closing, which I easily attained going through my normal independent insurance agent who writes all of my insurance.
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Nowizard
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by Nowizard »

Typical on escrow for taxes. In our area, they want an annual homeowner's. Ultimately, it makes no overall cost difference, just a possible cash flow issue that can be resolved by rolling it into the mortgage as has been mentioned.

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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by abuss368 »

Our lender, Wells Fargo, simply wanted one years worth of reserves in a bank account.
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quantAndHold
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by quantAndHold »

If the seller already paid the property taxes in advance, you’ll need to reimburse them. Alternatively, if you’re in a situation where property taxes are due in the next month or two and they’re paid out of an impound account, you’ll have to top up the account up front so that the taxes can be paid. All totally normal.

Also, if you’re living in a location where property tax amount resets when the property is sold, and the previous owner might have been paying much lower taxes than you will (this is common in California, for example), expect to get a very large bill in a few months for the difference. Yes, you will owe it, and no, it won’t be paid out of the impound account. You’ll need to write a check.

Did you know how much the property taxes were before you bought the place?
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Jags4186
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by Jags4186 »

I am closing on a refinance next week. I have to pay Q3 property taxes at closing and an additional 2 months prepaid property taxes and 4 months HOI (my HOI is due in 8 months).

Don’t think it is that unusual.
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by crefwatch »

Since property taxes are typically paid three months at a time, this does not seem unreasonable at all. You will find that there is a lot of latency and slop in the operations of mortgage servicers. It's actually good for you that they are certain to have the money on hand for THEM to fulfill YOUR obligations.
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teen persuasion
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by teen persuasion »

crefwatch wrote: Sat Jul 04, 2020 10:18 am Since property taxes are typically paid three months at a time, this does not seem unreasonable at all. You will find that there is a lot of latency and slop in the operations of mortgage servicers. It's actually good for you that they are certain to have the money on hand for THEM to fulfill YOUR obligations.
I don't think there's a typical payment schedule across the country. Our property taxes are paid annually, no other choice.
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MP123
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by MP123 »

teen persuasion wrote: Sat Jul 04, 2020 10:22 am
crefwatch wrote: Sat Jul 04, 2020 10:18 am Since property taxes are typically paid three months at a time, this does not seem unreasonable at all. You will find that there is a lot of latency and slop in the operations of mortgage servicers. It's actually good for you that they are certain to have the money on hand for THEM to fulfill YOUR obligations.
I don't think there's a typical payment schedule across the country. Our property taxes are paid annually, no other choice.
And ours are due semi-annually, but you can pay in advance if you want to.
Big Dog
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by Big Dog »

crefwatch wrote: Sat Jul 04, 2020 10:18 am Since property taxes are typically paid three months at a time, this does not seem unreasonable at all. You will find that there is a lot of latency and slop in the operations of mortgage servicers. It's actually good for you that they are certain to have the money on hand for THEM to fulfill YOUR obligations.
Our state property taxes are due every 6 months, or two times per year. Regardless, I remain amazed that some/many Bogleheads have escrow accounts for taxes and insurance. Why not pay the bills yourself when due? If an escrow is required by the 'bank', find a new lender that allows you to keep your own money in your own bank account.
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YesWeCan713
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by YesWeCan713 »

teen persuasion wrote: Sat Jul 04, 2020 8:47 am Three extra months of escrow is STAGGERING? We paid off our mortgage years ago, but 3 months would have been about $1k for us, in NY. How high are your property taxes?


I don't know if this varies by state rules, but there was a minimum balance that our escrow had to maintain monthly, can't recall exactly the number but I seem to recall it was something like 5/12 the total of escrow paid bills. Every year they would readjust the escrow amount by figuring the new total (after getting annual new bills), dividing by 12, then projecting monthly balances with escrow pay-ins and property tax/insurance/school tax payouts at various times of the year. Every month had to stay above that minimum balance; if any month was projected to go below, the difference to bring it up needed to either be added upfront once a year, or was prorated over the upcoming year (increasing escrow). Conversely, if monthly balances were projected to be higher than needed, they sent us a check to correct it and might decrease escrow payments.

Unfortunately, the timing of these annual assessments was immediately before school taxes were billed, which led to an annual see-saw in escrow payments. The calculations started in August with current year paid property tax and insurance (January) but past year school school tax (October). When school taxes increased above past year's amount (used in the projection), the higher amount ate into the balance going forward. Which is why they build in that minimum balance rule, to compensate for unexpected increases. Next year's adjustment, the new higher total balance increased escrow payments, PLUS the amount to make up for the shortage, PLUS something to keep every month above the minimum (timing of payments drops it low in February, usually). Now we are sending more than needed to pay the actual bills, to maintain the minimum monthly. Fast forward another year, and we have an excess in escrow, and by law they have to refund it to us and they decrease the monthly escrow amount. But school taxes WILL increase next month (they just haven't seen the bill yet), and the cycle repeats.

If I could have moved the adjustment month, I could have smoothed out the escrow payments over time. If I could have given them an estimate of next year's tax bill (instead of relying on past bills) I could have smoothed them. If I could have rejected the decreased escrow payments (that I knew were too low), I could have smoothed them. But that wasn't how the system worked.

TL;DR:
There's a minimum you need to maintain in escrow every month, perhaps equal to 5 months escrow payments. This minimum protects against fluctuations in actual bills to prevent negative escrow balance. Be prepared for escrow payment fluctuations from year to year (if a 3 month escrow payment is STAGGERING).
It comes out to being $2700. Its not bank breaking just alarming because our loan estimated stated 2 months. Not even a month later and the final disclosure is 2.5x what we were originally shown.
bluebolt
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by bluebolt »

YesWeCan713 wrote: Sat Jul 04, 2020 2:01 pm It comes out to being $2700. Its not bank breaking just alarming because our loan estimated stated 2 months. Not even a month later and the final disclosure is 2.5x what we were originally shown.
When we recently refinanced, our estimate went from 3 months to 5 months of taxes due to the timing. A quarterly tax payment was due within 2 weeks of closing, so that needed to be paid right away. Then we had to fund 2 additional months. Seemed reasonable to me.
jharkin
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by jharkin »

There are different rules in each state for the taxes, usually based on how often they get paid. They usually want the account funded so there is never less than 2 month cushion, so if the taxes are quarterly and the next payment is within a month of closing 5 months tax sounds about right. States that do semiannual tax could hit you with 8 mo of escrow if your timing is bad.

For insurance, I have seen them want up to a year in advance.


Question: can you get escrow waived? I have a couple times on refi’s. Eliminates all the hassle :D
Last edited by jharkin on Sat Jul 04, 2020 6:59 pm, edited 1 time in total.
cherijoh
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by cherijoh »

YesWeCan713 wrote: Sat Jul 04, 2020 7:03 am Hello Bogleheads,

My bank is asking for 5 months of property taxes and insurance on our closing. We've been reading that it is typically 2 months for both. We're at the Final Disclosure stage and this number just seems STAGGERING. Any advice?

Best,

YWC
If this amount is staggering, then it doesn't sound like you are quite financially prepared to buy this house from a cash flow perspective.

I think you may have been confused by how much of a cushion a mortgage lender is allowed to keep (that is 2 months) and what happens when you buy a house in the middle of the year and actually have bills that need to be paid out of escrow before you have been in the house for very long. For example if you were paying taxes and insurance out of escrow on the same day, the remaining balance after paying both bills can not be more than 1/6 of the amount the bank estimates for next year's bills.

If you are a first time buyer, you may need to pay for a 12-mo homeowners policy up front plus play catch up on taxes so that you have enough in the account to pay the pro-rated amount of property taxes for however many months you are in the house.

When is the tax bill actually due? My 2020 tax bill will drop later this month with a due date of Sep 1st even though late fees don't start accruing until January. I haven't had escrow (or a mortgage) for a while, but IIRC the bank paid the tax bill near the due date and didn't push it out until the last minute. If you are in a similar situation, the bank is actually going to need to pay the taxes out of escrow and therefore won't actually be holding onto the entire amount as a permanent cushion.

Or were you mistakenly expecting the previous owner's escrow balance to transfer to you so that you didn't need to play catch-up?
cherijoh
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by cherijoh »

Big Dog wrote: Sat Jul 04, 2020 11:29 am
crefwatch wrote: Sat Jul 04, 2020 10:18 am Since property taxes are typically paid three months at a time, this does not seem unreasonable at all. You will find that there is a lot of latency and slop in the operations of mortgage servicers. It's actually good for you that they are certain to have the money on hand for THEM to fulfill YOUR obligations.
Our state property taxes are due every 6 months, or two times per year. Regardless, I remain amazed that some/many Bogleheads have escrow accounts for taxes and insurance. Why not pay the bills yourself when due? If an escrow is required by the 'bank', find a new lender that allows you to keep your own money in your own bank account.
If you aren't putting a 20% down payment you might have trouble finding a lender that doesn't require an escrow account. Especially in the midst of a economic crisis.

I didn't know it was optional until I used a mortgage broker during the first refinances on my current home. I had put down 20% at the time of purchase and probably had an LTV of 60% or less when I went to refinance.
quantAndHold
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by quantAndHold »

Big Dog wrote: Sat Jul 04, 2020 11:29 am
crefwatch wrote: Sat Jul 04, 2020 10:18 am Since property taxes are typically paid three months at a time, this does not seem unreasonable at all. You will find that there is a lot of latency and slop in the operations of mortgage servicers. It's actually good for you that they are certain to have the money on hand for THEM to fulfill YOUR obligations.
Our state property taxes are due every 6 months, or two times per year. Regardless, I remain amazed that some/many Bogleheads have escrow accounts for taxes and insurance. Why not pay the bills yourself when due? If an escrow is required by the 'bank', find a new lender that allows you to keep your own money in your own bank account.
If your down payment is less than 20%, the bank will likely require an impound account. Also, my last mortgage gave me a discount of some sort (I don’t remember what or how much) to have an impound account the first year. I took the discount, then had them remove it after the year was up.

Honestly, I went back and forth on the impound account. In the early days, when I made little enough money that I would have had to consciously save for the insurance bill and property taxes, the impound account was a way to make sure the money was there. After having enough money was no longer a problem, it was a matter of convenience vs control.
Yes, I’m really that pedantic.
delamer
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by delamer »

livesoft wrote: Sat Jul 04, 2020 7:27 am If the seller already paid in advance for the next 5 months of property taxes and insurance, then you are not going to get that for free. You gotta pay for it yourself.
To clarify, it is true the sellers may have prepaid property taxes for the house for which the OP has to reimburse them.

But they can’t have prepaid the OP’s insurance premium.

And it does stink that the final number is so much higher than the estimate. However, they are are not overcharging the OP, just collecting the funds due sooner. I certainly wouldn’t change lenders over the issue.
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teen persuasion
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by teen persuasion »

YesWeCan713 wrote: Sat Jul 04, 2020 2:01 pm
It comes out to being $2700. Its not bank breaking just alarming because our loan estimated stated 2 months. Not even a month later and the final disclosure is 2.5x what we were originally shown.
Yikes, $900/month escrow. Our PITI was $900, and we had an ugly 9.75% mortgage.
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by BrandonBogle »

cherijoh wrote: Sat Jul 04, 2020 6:02 pm When is the tax bill actually due? My 2020 tax bill will drop later this month with a due date of Sep 1st even though late fees don't start accruing until January. I haven't had escrow (or a mortgage) for a while, but IIRC the bank paid the tax bill near the due date and didn't push it out until the last minute. If you are in a similar situation, the bank is actually going to need to pay the taxes out of escrow and therefore won't actually be holding onto the entire amount as a permanent cushion.
My 2020 tax bill is the same. I am refinancing and my estimated closing date is close enough to 9/1 that even though I don’t have an escrow, they want to collect the taxes at closing, stating it is a Fannie Mae requirement.

Seeing as I’m about to turn around and pay that (though likely a little later than they would), oh well. It’s a bill I would have to pay no matter what.
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by retire2022 »

Op

Ask your attorney for draft closing statement

It is also known as a payoff statement on day of closing

The draft closing statement describes what parties are due funds

My seller did not pay local property taxes, my attorney directed me to write a check to the local town tax and school district out of sale cost they owed.

This was typical and i accepted it.

Best
delamer
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by delamer »

teen persuasion wrote: Sat Jul 04, 2020 8:42 pm
YesWeCan713 wrote: Sat Jul 04, 2020 2:01 pm
It comes out to being $2700. Its not bank breaking just alarming because our loan estimated stated 2 months. Not even a month later and the final disclosure is 2.5x what we were originally shown.
Yikes, $900/month escrow. Our PITI was $900, and we had an ugly 9.75% mortgage.
The OP said it covered 5 months, so escrow is $540.
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AAA
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by AAA »

nps wrote: Sat Jul 04, 2020 7:22 amOr ask your lender to waive escrow and pay it yourself.
Years ago, my mortgage company was delinquent in paying one of my real estate taxes so I requested that I pay these myself. They refused.
musicmom
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by musicmom »

Years ago, our lender decided to pay our quarterly tax bill to my NEXT door neighbors account.
We found out when we received the delinquent notice from the town.

Never happened again with that house. Now with no mortgage, we pay quarterly to our new town.
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teen persuasion
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Re: Lender is asking for 5 months of Property Taxes and Homeowner's Insurance. Is this normal?

Post by teen persuasion »

delamer wrote: Sun Jul 05, 2020 9:35 am
teen persuasion wrote: Sat Jul 04, 2020 8:42 pm
YesWeCan713 wrote: Sat Jul 04, 2020 2:01 pm
It comes out to being $2700. Its not bank breaking just alarming because our loan estimated stated 2 months. Not even a month later and the final disclosure is 2.5x what we were originally shown.
Yikes, $900/month escrow. Our PITI was $900, and we had an ugly 9.75% mortgage.
The OP said it covered 5 months, so escrow is $540.
As the OP said he'd expected 2 months, I was interpreting the $2700 as the unexpected extra 3 months.
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