Pre-Reserve Taxes

[Anonymous]

I had a question on my Taxes. I am trying to close next month, and on my estimated GFE they are charging me 4 months of Taxes ( Reserves ) which is little over $1000 and i am trying to cut this number down to half to reduce my closing costs. I was wondering, since i am closing at the end of the year (November) and my taxes are due by 31st December 2009, can i only pay 2 months of Reserves. Why would they need 4 months, who do i contact to bring this down to 2 months, LO or title company?

Also, these 4 months of advance taxes and Insurance, when do i get it back ? do I just make PI payments instead of PITI , for first few months ?

[Anonymous]

No, you can not generally reduce them.  4 months is fairly standard.  Usually, they will require enough so that when your next payment is due, all the money is available in the escrow account at least a month ahead.

As far as getting it back, you don't really.  It goes into the escrow account and then it just builds to cover the next periods bill.  When you refi or sell the house there may be a refund of some money, but that is it.  It is not a deposit of any sort, it is pre-paying expenses.

[ShanetheMortgageMan]

On most loans these days, at closing, the lender requires you to set up an escrow account in which they will pay your future property tax & homeowners insurance bills from when they come due.  In your situation, since the taxes are due 12/31/09, and you will be closing in November, the amount of taxes that will be due is likely going to be the entire amount of taxes due on 12/31/09, reason being is because if you close in November your 1st mortgage payment won't be due until January 1st (December 1sts payment isn't made because there won't be enough time to set the mortgage up in the lenders servicing department, but you pre-pay the interest that December 1sts payment would've paid for, at closing), so the lender will need to make sure the taxes are paid which is why they are going to require the entire amount due in December to be collected for at closing.  In addition to the amount that is needed (the entire amount due on 12/31/09), they can require an additional 2 months of escrow reserves as a "cushion" in case a couple payments are missed, etc. they'll still have the necessary funds (or close to the necessary funds) to pay the taxes & insurance.  Same thing with your insurance, if it's due in November 2010, and your 1st payment isn't until January 1st, you will have only made 10 payments before they disburse for your homeowners insurance to be sent out, or shy 2 months, and then the 2 month cushion on top of that would make it a total of 4 months.

You'll find the below information helpful about the amount of escrow reserves being collected for at closing. 

http://www.hud.gov/offices/hsg/ramh/res/respafaq.cfm

About Escrow Account Cushions

Does RESPA require lenders to maintain a cushion?

NO. The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails.

The accounting method generally requires borrowers to maintain lesser amount in the account than the single-item method predominately used by lenders. However, many lenders have recently increased the escrow account cushion to the maximum allowed by law.

The regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.