An escrow account is a special cash account that your mortgage lender uses to pay your property taxes, homeowner's insurance premium, private mortgage insurance and homeowner's association dues, if applicable. Your lender projects the cost of these liabilities each year and divides the amount equally into 12 monthly installment payments billed as a part of your mortgage payment, relieving you of the burden of reserving funds for such expenses. However, an increase in your property taxes or other escrow expense could result in an account shortage, leaving your lender to foot the bill.
Accounts
An escrow account is a cash account -- not a line of credit or a loan. You fund the account throughout the year and use funds in the account to pay property and mortgage-related bills when they come due. It is treated as a personal checking or savings account would be treated at a bank. A shortage of funding in the account to pay your tax and insurance obligations is treated as an overdrawn account, and your bank will subsequently notify you of the shortage and how to bring the account positive.
Credit Scores
According to chartered financial analyst Dr. Don Taylor of Bankrate.com, a FICO credit score does not reflect information in your personal accounts, but your borrowing history. In other words, while defaulting on your principal mortgage payment will damage your credit after becoming 30 days past due, your escrow shortage will not affect your credit score so long as you work with your lender to balance the account.
Balance
If your escrow balance falls negative, your lender will likely give you two options for bringing the account positive. You may choose to pay the deficiency with one lump sum, or you may opt to spread out the deficiency over several months of mortgage payments by increasing your escrow payment each month. If a tax increase or insurance premium hike is to blame for the low funds, your lender will also adjust your future escrow payments to avoid a future low balance.
Warning
Your credit score may suffer if you do not abide by your lender's guidelines to bring your escrow account positive. Your escrow payment is a part of your monthly mortgage payment, and according to MSNBC.com, even if you send your lender a check for your payment amount prior to the adjustment of your escrow payment, your lender probably won't accept it. Most lenders will only accept a full payment. Once you miss a payment by 30 days, your FICO credit score will take a hit. Continuing to fall behind on payments by 60, 90 and 120 or more days will further damage your credit and could ultimately cause foreclosure.
I have not paid any money into an escrow account but have paid my property taxes
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