Estimating escrows in KY is the SAME in all 120 counties.
[What’s “escrow”? – For all non-lenders: Your monthly payment usually includes the amount to pay back your loan each month (principal and interest), plus 1/12th of your annual property tax bill, and 1/12th of your annual home owners’ insurance premium. When your lender gets your total payment each month, they take your principal and pay down on the loan’s principal balance; they take the interest and put it in their pocket as income…and then they put those 1/12th of taxes & ins. into what’s called an escrow account. An “escrow” account is just a funny word for a “holding” account. At the end of the year, the lender will pay your home owners insurance and your property tax bill for you…out of that escrow account. Escrow accounts are governed by special laws requiring certain care, etc, as it is not the lenders’ money, it’s yours. Because it’s yours, whenever you end up selling your house, you’ll get the balance in your escrow account refunds to you from the lender.]
Lenders – How to estimate the amount of taxes & insurance to collect from the buyers, up front, at closing:
1. HOI is easy, as you know: You have to collect a full year’s worth of home owners insurance at the closing of any home purchase. This amount is easy to ID, as all insurance premiums are paid in advance. Lenders will just get the annual premium amount from the HOI company.
2.Property Taxes are NOT paid in advance, but in arrears…after the fact. Bills are mailed in October each year.
a) When the lender goes to pay the buyers’ property taxes at the end of the year in KY, in October, they will need see 14 months of taxes sitting in the buyers’ escrow account. (This is 12-months to pay the bill, plus a 2-month cushion required by federal law.)
b) So – all loan officers have to do, is to count the number of monthly payments that the buyers will make, thru and including October. (This is how many months of taxes the buyers will have paid into their escrow account.)
Then take 14, and subtract that number (the one you just counted) from 14, and you’ve got the number of months’ worth of taxes you will need to collect for, at closing.
c) Example: Closing is in April. The first payment won’t be due/made until June. Count June thru and including Oct, and you get five payments that the buyers will have made into their escrow account, at the time the tax bills are issued in October. But, the lender needs 14 months’ worth in there. So, 14 (goal) – 5 (actually paid in) = 9 months’ worth of taxes that are needed to be collected up front at the closing – so that when October rolls around and the lender is staring a 12-month tax bill in the face, there will be 14 months of taxes sitting in the escrow account. After they pay the 12-month tax bill, the escrow account will still have the required 2-month reserve sitting in it, and everyone is happy.
About KY property taxes
1. All KY property taxes are PAID IN ARREARS, and collected on a calendar year. Bills are mailed each October.
2. Therefore, whatever the amount is that your lender is collecting from you each month, is AN ESTIMATE ONLY.
3. BECAUSE THEY ARE ESTIMATING how much to collect from you each month, this means that when your lender goes to pay your actual tax bill, there will either be too much in your escrow account, or too little.
4. If there is too much in your escrow account, the lender will send you a check, as required by law.
5. If there is too little in your escrow account, you’ve got to pay the lender that amount. Usually, the lender will take the shortage, divide it by 12, and add that amount to each of your next year’s monthly payments.
6. Fayette County: When you pay your taxes at each year’s end in Fayette County, you’re actually paying for the 2nd half of the current year, and the 1st half of the coming year.
a) This ONLY affects the prorations on settlement statements. If you look at the dates of all tax prorations on Fayette County properties’ settlement statements, you’ll see the dates reflecting the fiscal year of July 1 thru June 30.
b) This does NOT affect the collection-of-escrows calculation for a purchase’s closing costs. WHEN you collect is the same. What you collect for (what time period) is the only thing that’s different.