Strategic Approaches to Effective Escrow Calculations for Lenders

Bob Schulte
May 21, 2024
8 mins read
Strategic Approaches to Effective Escrow Calculations for Lenders

Imagine a world where escrow calculations are a breeze, not a nail-biting guessing game. A world where surpluses and shortages become relics of the past, replaced by smooth transactions and happy clients. Wondering how to do that, especially with the ever changing nature of the real estate finance market? Well, let’s just say we have a few tricks up our sleeves. 

When performing escrow calculations, more than a calculator, you need a strategic approach. Fortunately, we have quite a few. These will empower you to ditch the spreadsheets and yet, end up with error-free escrow calculations for the borrowers. Intrigued? Let’s begin!

Understanding the Key Components of Escrow Calculations

Before beginning the calculations, lenders must know the components. Apart from the borrower’s mortgage amount, escrow calculations include the following:

  • Property taxes: Property taxes are a key factor in escrow calculations. Lenders estimate the annual taxes based on property value and tax rates. This is then divided into monthly payments to ensure funds are available when tax bills come due.
  • Homeowner’s insurance: Another critical component is homeowner’s insurance, which safeguards the property against damage or loss. Lenders calculate the annual insurance premium and divide it into monthly installments.

It can also include the following (if applicable):

  • Mortgage insurance: For borrowers with less than a 20% down payment, mortgage insurance may be required to mitigate the lender’s risk. The monthly premium is included in the escrow amount in such cases.

  • Flood insurance: Properties located in flood-prone areas may necessitate flood insurance coverage. Lenders factor in the cost of flood insurance premiums when calculating escrow payments.

  • Homeowner’s Association (HOA) fees: This fee is included when the property is located within communities governed by a homeowner association. These fees are recurring payments collected by the HOA from homeowners to cover the costs of maintaining shared amenities, common areas, and community services.

  • Escrow cushion: Lenders often include a cushion or reserve amount in escrow calculations to cover potential fluctuations in tax or insurance costs. It acts as a buffer, ensuring that the escrow account maintains the required balance to meet future obligations without causing a shortfall.
But why exactly is it important to ensure accurate escrow calculations?

Precise escrow calculations ensure that there are sufficient funds in escrow accounts to cover property taxes, insurance premiums, and other associated expenses, preventing potential shortages or surprises. 

Accurate calculations also foster transparency and trust in the lending relationship, allowing borrowers to manage their homeownership costs effectively and lenders to mitigate risk. Additionally, precise escrow calculations contribute to regulatory compliance, financial accountability and adhere to accounting rules. This safeguards against potential penalties or legal complications. 

3 Most Common Challenges of Escrow Calculations Faced by Lenders

  • Fluctuating Property Taxes

Property tax rates and assessments can vary significantly over time due to changes in local ordinances, property values, and reassessments. Lenders must accurately anticipate these fluctuations to ensure that escrow payments align with the actual tax obligations, preventing underfunding or overpayment of escrow accounts.

  • Insurance Premium Changes

Homeowner’s insurance premiums are subject to adjustments based on factors such as changes in coverage, claims history, and market conditions. Lenders must closely monitor insurance policy renewals and adjust escrow payments accordingly to avoid discrepancies between the collected funds and the actual insurance costs.

  • Managing Escrow Shortages and Surpluses

Escrow accounts are subject to periodic analyses to determine whether they maintain the required balance to cover upcoming expenses. Shortages or surpluses in escrow accounts can arise due to miscalculations, changes in expenses, or fluctuations in interest rates. Lenders must effectively manage these discrepancies to ensure they are in compliance with regulatory guidelines.

How is Escrow Calculated (+ Formula)

To calculate escrow, you only need one formula: 

Monthly Escrow Payments = Total annual escrow expenses ÷ Total number of monthly payments


Here, total annual escrow expenses includes: 

Property taxes + Homeowner’s insurance + Cushion (up to 2 months) + Minimum balance

  • Cushion:
  • Up to 2 months

  • Minimum balance:
  • Sometimes, the payments required (insurance, taxes, etc.) are required before the escrow account has enough money in it to pay those expenses. While creating an initial escrow calculation analysis, if the incoming escrow payments and the outgoing escrow expenses create a negative escrow balance, lenders add this negative balance to the cushion amount. This ensures that at all times, the lender has at least 2 months of cushion in the escrow account.

    To understand the escrow calculation and its components better, here’s a detailed manual escrow calculation: Download Escrow Calculation Sheet Note: Escrow calculations are complex and require extreme accuracy. A slight error can have a big implication on the monthly payment for the borrower. It is important to ensure that the calculations are accurate and updated correctly. 

    Escrow calculations, while intricate, can be done using the formula provided above. All you have to do is consolidate the annual expenses of the borrower towards the escrow components and divide it by the number of annual payments the borrower would make. It is typically 12 payments, for each month of the year.

    7 Strategic Approaches for Lenders to Calculate Escrow Accurately

    1. Gather Essential Information and Verify Borrower Details

    Firstly, you need to get every possible detail from the borrower and verify those.

    This includes:

    • Property tax assessment: Obtain the current property tax assessment from the relevant tax authority.

    • Insurance premiums: Collect information on insurance premiums for property insurance, homeowners insurance, and any other applicable policies.

    • Other escrow components: Identify any additional expenses, such as homeowner association fees or flood insurance premiums, that may need to be included in the escrow calculation.

    Accurate borrower information forms the foundation for precise escrow calculations.

    1. Determine Escrow Components and Frequency of Payments 

    Next, sit with the borrower and communicate all the escrow components you are going to include. This step helps maintain transparency of the transaction before the borrower signs on. 

    Then, decide whether these expenses will be paid annually, semi-annually, or on a different schedule based on regulatory requirements and borrower preferences.

    1. Calculate Escrow

    Then comes the calculation part. Now, there are two ways you can do so, one is the traditional way and another is the futuristic way. Here’s both:

    • Manual Calculation: You can use the escrow calculation formula provided above to do the calculation manually. To reiterate, calculate the total annual escrow expenses and divide it by the number of payments per year. 

    Note: Manual calculation is prone to errors and is time consuming. This can result in borrower dissatisfaction and possible compliance breached.

    • Automate Escrow Calculation with Escrow Management Software: Leveraging escrow management software streamlines the calculation process, ensuring error-free calculations and saving time. The software uses automation to facilitate seamless updating and managing of escrow payments for all borrowers.
    1. Continue to Modify and Update Escrow Payments According to Economic Changes

    Before you can conduct escrow analysis, there may be economic changes in effect. These changes can cause an increase or decrease in the property taxes, insurance premiums and other escrow components, making you recalculate the escrow payments for all your borrowers. Sounds hectic right? 

    But with a mortgage escrow software you can conduct these re-calculations whenever needed, all with a click of a button. So, be sure to leverage this technological marvel and save your valuable time.

    1. Conduct Annual Escrow Analysis

    Now, conduct an annual escrow analysis to review and reconcile escrow accounts, ensuring they remain accurate and up-to-date. This process involves assessing actual expenses against projected costs and making adjustments as necessary to maintain the account’s balance. It also helps determine if there will be changes in the monthly escrow amount for the next 12 months. 

    1. Keep Borrowers in Loop at All Times

    Any changes, even a change in a single penny, should be promptly reported to the borrower. More importantly, it is imperative that borrowers are informed of everything, even if it is just a quarterly report. 

    Provide clear explanations of how escrow payments are calculated, including the breakdown of expenses and any adjustments made. Address any questions or concerns from borrowers promptly and courteously. This helps in ensuring that your escrow calculations are not disputed later by the borrower, thereby ensuring effective escrow calculations.

    1. Track All Escrow Payments to Stay Ahead of Disparities in Payments

    Track all escrow payments meticulously helps identify any disparities or discrepancies promptly. For example, a borrower may have accidentally paid twice in a month. If you flag this on time, it will establish trust. 

    Also, by staying vigilant and proactive, you can address issues such as missed payments or insufficient fund reserves before they escalate. This ensures the smooth operation of escrow accounts and minimizes lender’s risk.

    A Quick Escrow Calculation Cheat Sheet to Ensure All Necessary Components Are Incorporated

    Escrow Calculation Cheat Sheet

    ☑ Include Essential Information:

  • Property taxes

  • Insurance premiums (property insurance, homeowners insurance, etc.)

  • Other escrowed items (e.g., homeowner association fees, flood insurance premiums)

  • ☑ Determine Escrow Items and Frequency:

  • Identify which expenses will be escrowed.Decide the frequency of payments (e.g., annually, semi-annually, monthly).

  • ☑ Calculate Total Annual Expenses:

  • Total Annual Expenses = Sum of property taxes + insurance premiums + other escrowed items.

  • ☑ Calculate Borrower’s Monthly Payments:

  • Monthly Escrow Payment = Total Annual Expenses ÷ 12

  • ☑ Incorporate Cushions [if applicable]:

  • If you are levying a cushion, add the amount into the annual expenses as well and then divide by 12.
  • How Bryt Escrow Management Software Ensures 100% Error-free Escrow Calculations

    Mastering escrow calculations is a critical aspect of lending. It requires attention to detail, strategic planning, and effective communication. But why do all that  manually when you can have a savvy sidekick do all the heavy lifting for you, 24 across 7? 

    Bryt Escrow Management Software is precisely designed to take the load off you whilst guaranteeing 100% accurate escrow calculations. Check out trending features: 

    • Error-free escrow calculations in minutes: Bryt Software utilizes advanced algorithms to swiftly and accurately compute escrow amounts. So now you can minimize the risk of calculation errors and ensure precise payment amounts for every borrower.

    • Automate escrow management tasks: Streamline administrative processes by automating tasks such as tracking payments and generating reports, saving time and increasing efficiency.

    • Automate escrow payments: Seamlessly schedule and process escrow payments on behalf of borrowers. This ensures timely disbursement of funds and compliance with payment schedules.

    • Create escrow analysis statements: Generate comprehensive statements detailing escrow account activity, facilitating transparent communication with borrowers and regulatory compliance.

    • Modify escrow expenses quickly: Effortlessly adjust escrow expenses in response to changes in property taxes, insurance premiums, or other factors. This way you can ensure accurate and up-to-date escrow calculations.

    Ready to revolutionize your escrow management process and ensure accurate escrow calculation without so much as looking into your calculator? Go ahead, and request a demo with us to find out for yourself!

    Bob Schulte

    About Bob Schulte
    Bob Schulte, CEO, Bryt Software is the visionary leader behind Bryt’s groundbreaking approach to loan management. With 30+ years of experience in the SaaS industry and an impressive 25 experience years of education, Bob brings diverse SaaS expertise to the table. He is known for his innovative approaches and commitment...

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