Escrow reconciliation is the process of reviewing an account during or at the end of an escrow period to ensure that all payments have been made and disbursed properly.
The process is vital because it’s the only way to know that the financial records are accurate and complete. For example, in the case of a real estate purchase, if there’s a problem with the escrow account and closing doesn’t occur as scheduled, it could cost both parties money, delay their plans, and cause additional stress.
If you’re selling your home, for instance, you’ll want to make sure your lender has released its lien on the property so that you can clear the title and hand over the keys to your buyer. If you’re buying a home, you’ll want to be certain that all of your funds have been appropriately disbursed, so there are no liens against the property.
Because it happens at or near closing time, escrow reconciliation can be stressful. But if you work with a reputable escrow company, regularly review your account statement, and ask questions before signing final documents, understanding and resolving any discrepancies should be relatively straightforward.
Let’s look at other reasons why escrow reconciliation is important.
Why is Escrow Reconciliation Important?
Help to account for changes on a mortgage
Escrow reconciliation is a process that helps account for changes on a mortgage. Escrow accounts are used to pay for property taxes and insurance premiums, which can fluctuate from year to year. So each year, the servicer reviews escrow account activity, determines if there’s a shortage or surplus, and adjusts the monthly payment as needed.
Things you should know about escrow reconciliation:
– It happens once a year
– You’ll get an annual statement telling you what your total payments were and how they were used
– If there’s a surplus, it will be refunded to you
– If there’s a shortage, it will be added to your monthly mortgage payment, spread out over 12 months
It helps to make sure you have enough money set aside in your escrow account
Escrow reconciliation is the process used to make sure you have enough money set aside in your escrow account to pay your property taxes and insurance when they’re due.
During this process, the stakeholders compare the amounts we collected in escrow during the year with the actual taxes and insurance payments made on your behalf. If there was a shortage or overage, they might need to adjust your monthly mortgage payment.
The goal is always to keep your escrow account as accurate as possible. Keep in mind that escrow accounts only estimate what will be owed in taxes and insurance for the upcoming year.
- Helps to avoid shortage or overage at the end of the year
Escrow reconciliation ensures that the amount you pay each month will be enough to cover year-end expenses. If there is a shortage, you may have to pay a large sum out of pocket to make up the difference, or your lender may decide to increase your monthly payment for the following year. Reconciliation also protects you from overage. When your escrow account has more money at the end of the year than it needs, your lender is required to refund your excess funds.