WTF is the Aggregate Adjustment on my Closing Disclosure?
You see it on every Closing Disclosure. Since it’s in Initial Escrow Payment at Closing section, and it’s a credit, you ignore it. Right? You know you do.
A client asks about it. Now what?
Like most everything in the home loan process, the escrow account set up must follow federal regulations.
First, what’s an escrow account.
An escrow account is a single purpose account. It’s money that is collected to be spent for a one purpose. There are many different escrow accounts that can be set up. This is about the escrow account set up solely to pay your home’s taxes and insurance on time.
Lenders want you to escrow taxes and insurance. They want to protect their investment in your home. Usually they have a larger stake in the home than you do. One of the few things that can take priority over a mortgage in a default is a tax lien. Lenders don’t want anyone in line ahead of them when it comes time to be paid. Would you?
You pay a portion (about 1/12th) of your annual property taxes and annual insurance premium each month along with your mortgage payment. These funds are held in an escrow account until either your taxes or insurance are due. Then it’s paid on your behalf.
Simple enough. Convenient too. It may not always be best to escrow your taxes and insurance. Check out some personal finance blogs for more.
When you close a new loan, a new escrow account must be set up if you choose to escrow property taxes and insurance. Every damn time.
There’re a few steps, nothing scientific about it.
First, the lender will calculate how many payments will be made before either the taxes or the insurance is due.
Second, they will want enough in the escrow account to pay whatever is due on the due date.
Third, they will want a cushion to be sure there are enough funds to pay even if the amount to be paid changes or a recent payment hasn’t processed through yet.
An example.
You close on a new home loan on 7/15. Your first payment is due on 9/1 — mortgages are paid in arrears, meaning on 9/1 you are paying the August payment. Your annual property taxes are due in full on 11/1 of the same year.
The lender calculates they will receive two payments before the property taxes are due: 9/1 & 10/1. They cannot be sure the 11/1 payment will process in time. 12 months of taxes are due. This results in an advance collection of 10 months of property taxes + a cushion of 1-2 months. Just to be sure.
Well, the lender’s calculation may result in too much money being collected according the CFPB — the mortgage police. The CFPB doesn’t want lenders going around taking too much of people’s money to place in escrow accounts.
This is where the Aggregate Adjustment comes in. It’s usually a credit back to the homeowner due to a requirement that the lender cannot collect more than 1/6th of the total annual payments as a cushion. If the lender’s calculation results in too much being collected, then a credit back to you must be made. This is shown on the Closing Disclosure as an Aggregate Adjustment.
