Q: I consider myself a financially responsible person. So why do prospective mortgage companies want to collect money to pay my property taxes and insurance (both mortgage insurance and hazard insurance?) They must not have much confidence in me, although my credit is great and I can put 10 to 15 percent cash down toward my home purchase and pay for closing costs.
A: Mortgage lenders or their loan servicing companies typically collect for payment of taxes and insurance for mortgage loans of more than 80 percent of a home's appraised value. Your down payment would require your mortgage lender to pony up 85 to 90 percent of your home's appraised value for a mortgage.
Mortgage lenders prefer to collect and pay out funds for taxes and insurance to protect their collateral interest in borrowers' homes and to establish records that verify payments were made. Here's why. If you don't pay your property taxes, the taxing authority could eventually sell your home to recoup unpaid property taxes. If this happens, you and your mortgage company could lose all interest in your home.
If you don't pay your hazard insurance premiums and your home burns down, neither you nor your mortgage company can collect on a claim if your hazard insurance has lapsed. Mortgage insurance protects your lender against losses if you don't make your mortgage payments and your home loan is foreclosed. If the premiums aren't paid on time, this could increase the amount of potential risk to your lender.
Mortgage lenders are required by law to supply borrowers an initial and annual accounting of funds collected for paying taxes and insurance and payments disbursed. If your mortgage company didn't collect enough to pay these expenses, it can raise your payment to cover any advances they made and to fund future tax and insurance payments.
Here's the good news: If your mortgage company collected more than needed for approximately two months of reserves plus amounts paid for taxes and insurance, you may receive a refund of the excess and/or have your mortgage payments reduced.
Our network of mortgage lenders can provide mortgage quotes and answer questions about mortgage programs and payment requirements.