real estate tax escrow on new construction

Anonymous · ‎02-11-2012

I am building a new home in upstate ny. House will be started in may built by august my county completes an assessment as of march 1st each year. So the school taxes due september 2012 and county taxes due january 2013 will be based on the assessed value as of march 2012 which will be for land only and will result in about $2000 actual taxes. My mortgage broker is telling me the initial escrow deposit for taxes will be based on the estimated taxes due besed on my purchase price. Or about $12,000 per year in taxes, and they want 5 months or $5000 for my initial escrow deposit at closing. Then i will pay $1000 per month from september 2012 till august 2013 for a total escrow of $15000 during that time. Actual taxes during that time will only be $2000 why do i have to pay $5000 at closing, why not $833 on the 5 months of $2000? Is this legal? If they do this my escrow payment will drop 70% in year do then go up 80% in year three does not seem right.

JM-AM · ‎02-12-2012

@Anonymous wrote:
I am building a new home in upstate ny. House will be started in may built by august my county completes an assessment as of march 1st each year. So the school taxes due september 2012 and county taxes due january 2013 will be based on the assessed value as of march 2012 which will be for land only and will result in about $2000 actual taxes. My mortgage broker is telling me the initial escrow deposit for taxes will be based on the estimated taxes due besed on my purchase price. Or about $12,000 per year in taxes, and they want 5 months or $5000 for my initial escrow deposit at closing. Then i will pay $1000 per month from september 2012 till august 2013 for a total escrow of $15000 during that time. Actual taxes during that time will only be $2000 why do i have to pay $5000 at closing, why not $833 on the 5 months of $2000? Is this legal? If they do this my escrow payment will drop 70% in year do then go up 80% in year three does not seem right.

Your escrow account is reviewed yearly (usually when taxes are due and or payable). The over payments are refunded to you usually in a check form and not credited to your account. Then your escrow account is updated for the following year with new payments owed.

Some counties, cities, states, will charge you taxes for the entire year even if your home was built in December. YMMV and you need to check the laws of the governing parties.

Just look at the bright side if no taxes are or were owed for that year you will have a big refund.

Good Luck
May all your dreams and wishes become a reality!

Anonymous · ‎02-12-2012

In my state and county Taxes are set in stone as of July 1, so if the property is just dirt as of July 1 then taxes will only be $2000 for the year. The last two mortgages I had in NY state escrow overages or shortgaes are paid out or made up in the following 12 months payments I know and talked to the assessor for the town where the house is being built and he agreed the first year taxes would be about $2000. I informed the mortgage broker and she agreed with me on that fact that the taxes to be paid in Septemebr 2012 and January 2013 would be a total of $2000. But she said the bank will still need a minimum of 5 months of RE taxes at closing based on estimated RE taxes on purchase price for a deposit of $5000.

It just does not seem legal to me that the bank knows for sure that taxes will not be more than $2000 but yet can take $5000 at closing. On top of the fact that I will pay an additional $5000 between September 2012 and January 2013. So after paying out September 2012 and January 12 taxes my escrow will be overstated by $8000, and then I will pay another $8000 between January 2013 and September 2013 into escrow and in September 2013 pay out $7000 in school taxes, bringing my overage to $9000. So essentially the bank gets to hold onto $9000 of my money for portions of the 12 months after the purchase for no reason at all. I have talked to three local mortgage reps at local bank branches and they all seem clueless on the reason why the banks do this same as my mortgage broker. I am just looking for a straight answer. According to the assessor I talked to this is common practive but if you complain enough to the financing bank they will back down and do it correctly. Anyone have luck with this? That money could earn me interest.

IOBA · ‎02-12-2012

The way I understand it (and things could have changed), the bank is required to keep a minimum of 6 months of reserves in the escrow account at all times.

If the average or estimated costs of taxes and insurance is 12k for the year, then the average cost is 1k a month.

The bank must at all times have at least 6k in the escrow account.

When they re-evaluate once a year, they will most likely increase the amount due each month based on the previous years shortages (increases in taxes or insurance), plus 10%. If there was no change in taxes or insurance costs, then they will likely increase the escrow by 10%. By law (and I don't know one it is - but the banks all say this) they can increase the escrow amount due up to 10% plus shortages each year.

The idea is when they pay out your 1st tax payment, there are still 6 months of reserves left in the account.

When they pay the 2nd tax payment, there are still 6 months of reserves left in the account.

When they pay the insurance premium, there are still 6 months of reserves left in the account.

It hurts to let them hold onto that much money all the time when you could be earning interest on it. But that is how they do things.

To avoid escrow, you would need to put down at least 20% and find a lender that will say ok to no escrow. Most banks will charge a slightly higher interest rate to insulate them from risk.

I hope this helps you understand the banks position.