These days, borrowers need to have a lot in reserve

I enjoy escrow reserves or impounds about as much as I enjoy having my car impounded. However, the former can be classified as a safeguard to prevent a mistake, and the latter, the result of a mistake.

When a home sale closes escrow, lenders require sums of money known as reserves to pay taxes, hazard insurance and personal mortgage insurance. The amount of these impounds depends on when in the year the deal is signed. For example, if a sale were finalized today, more money could be held in reserve for taxes than if the deal were to be closed six weeks down the road.

But what comes as a shock to borrowers is the adjustment of reserves during the term of the loan. The average person is uncomfortable with change, especially when it pertains to a fixed-rate loan guarding the roof over one’s head.

ADVERTISEMENT
0 seconds of 0 secondsVolume 0%
Press shift question mark to access a list of keyboard shortcuts
00:00
00:00
00:00
 

The reserves issue is getting a lot of attention, especially in light of Fannie Mae updating its policies for qualifying borrowers purchasing a new principal home and converting their existing principal residence to a second home or investment property. The stringent new rule that requires borrowers to have a reserve amount set aside equal to six months of principal, interest, taxes and insurance (PITI) payments on both homes when converting the primary residence to a rental or a second home. Previous guidelines did not include reserves on both homes.

Household budgets are created out of necessity. Few can accommodate an extra $200 out of the blue for housing. A lot of work and anxiety may go into accurately estimating monthly payments, only to be tossed into confusion one year into the loan.

Monthly principal and interest charges do not change over the life of a fixed-rate loan. But insurance and tax reserves can change.

Another way reserves can be affected occurs when another lender obtains the servicing on your mortgage. For example, the lender who wrote your loan generally will not keep it. Most home loans are packaged and sold to investors. The bank that wrote your mortgage no longer owns the loan, but merely retains the paperwork involved, commonly known as servicing.

When the loan is sold, the rules on reserves rarely change. However, when the actual servicing is sold, demands for additional reserves may result.

In a capsule, if your taxes and insurance go up, the lender will ask that you pay in advance to cover the costs. The lender does not want to advance money on your behalf. The bottom line is how much and how often these demands can be made. A lender has the right to establish a cushion to account for fluctuations, but I don’t see how you could make a case for doing it more than one time.

If you handle the taxes and insurance payments yourself — do not have them included in the monthly check to the lender — you will not be susceptible to new reserve requirements.

What bothers me is that there is no real notice given at closing that additional tax and insurance reserves could be demanded.

Sometimes, the money pulled out by the lender to pay taxes never makes it to the proper authority.

Most of the problems occur when loans are being transferred from one lender to another and some counties allow a grace period for repayment when that happens. But the taxpayer is ultimately responsible for paying the taxes. I think that needs to be spelled out when a home-loan closes — along with the potential for added reserves.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A standard jet fuel, left, burns with extensive smoke output while a 50 percent SAF drop-in jet fuel, right, puts off less smoke during a demonstration of the difference in fuel emissions on Tuesday, March 28, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
Sustainable aviation fuel center gets funding boost

A planned research and development center focused on sustainable aviation… Continue reading

FILE — Jet fuselages at Boeing’s fabrication site in Everett, Wash., Sept. 28, 2022. Some recently manufactured Boeing and Airbus jets have components made from titanium that was sold using fake documentation verifying the material’s authenticity, according to a supplier for the plane makers. (Jovelle Tamayo/The New York Times)
Boeing adding new space in Everett despite worker reduction

Boeing is expanding the amount of space it occupies in… Continue reading

Paul Roberts makes a speech after winning the Chair’s Legacy Award on Tuesday, April 22, 2025 in Tulalip, Washington. (Olivia Vanni / The Herald)
Paul Roberts: An advocate for environmental causes

Roberts is the winner of the newly established Chair’s Legacy Award from Economic Alliance Snohomish County.

Laaysa Chintamani speaks after winning on Tuesday, April 22, 2025 in Tulalip, Washington. (Olivia Vanni / The Herald)
Laasya Chintamani: ‘I always loved science and wanted to help people’

Chintamani is the recipient of the Washington STEM Rising Star Award.

Dave Somers makes a speech after winning the Henry M. Jackson Award on Tuesday, April 22, 2025 in Tulalip, Washington. (Olivia Vanni / The Herald)
County Executive Dave Somers: ‘It’s working together’

Somers is the recipient of the Henry M. Jackson Award from Economic Alliance Snohomish County.

Mel Sheldon makes a speech after winning the Elson S. Floyd Award on Tuesday, April 22, 2025 in Tulalip, Washington. (Olivia Vanni / The Herald)
Mel Sheldon: Coming up big for the Tulalip Tribes

Mel Sheldon is the winner of the Elson S. Floyd Award from Economic Alliance Snohomish County

Craig Skotdal makes a speech after winning on Tuesday, April 22, 2025 in Tulalip, Washington. (Olivia Vanni / The Herald)
Craig Skotdal: Helping to breathe life into downtown Everett

Skotdal is the recipient of the John M. Fluke Sr. award from Economic Alliance Snohomish County

Katie Wallace, left, checks people into the first flight from Paine Field to Honolulu on Friday, Nov. 17, 2023 in Everett, Washington. (Olivia Vanni / The Herald)
Executive order makes way for Paine Field expansion planning

Expansion would be a long-range project estimated to cost around $300 million.

Dick’s Drive-In announces opening date for new Everett location

The new drive-in will be the first-ever for Everett and the second in Snohomish County.

Helion's 6th fusion prototype, Trenta, on display on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
Helion celebrates smoother path to fusion energy site approval

Helion CEO applauds legislation signed by Gov. Bob Ferguson expected to streamline site selection process.

The Coastal Community Bank branch in Woodinville. (Contributed photo)
Top banks serving Snohomish County with excellence

A closer look at three financial institutions known for trust, service, and stability.

Image from Erickson Furniture website
From couch to coffee table — Local favorites await

Style your space with the county’s top picks for furniture and flair.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.