The mortgage aggregate adjustment determines the initial deposit that must be placed in the escrow account at closing. The formula is used to calculate the amount that allows a two-month cushion, which is a maximum sum of money in addition to the amount needed to cover escrow items in the borrower’s account at all times. It provides the lender with enough funds to pay for such items as property taxes and insurance. However, the escrow amount should not exceed what is legally allowed by Section 10 of the Real Estate Settlement Procedures Act.
The Real Estate Settlement Procedures Act (RESPA) allows lenders to collect an escrow cushion, and the mortgage aggregate adjustment is the calculation that is used to determine the amount of that cushion.
Lenders are allowed, but not required, by federal law to require borrowers to pay into an escrow account. Nevertheless, a lender may establish an escrow account to secure the investment in the collateral, and ensure the account covers any adjustments in escrow payments. The cushion for the escrow account should not exceed one-sixth of the aggregate amount of money for escrow payments. State laws, however, may require a lesser amount for the escrow cushion, which defeats RESPA limits, and the lender must follow the state law escrow limits.
To determine the initial escrow deposit amount, the lender starts with calculating the lowest projected balance for the account after the expected monthly escrow payments are paid for the year, which is the aggregate accounting adjustment. After the lowest negative balance is determined, the lender would add the cushion, which is calculated to be two monthly payments or less, depending on state laws.
On the HUD-1 Settlement Statement, section 1000 is the “Reserves Deposited with Lender.” If the lender establishes an escrow account, this section will include the initial deposit for the escrow account and the items that will be paid out of the escrow account. Once the initial deposit amount is determined, the lender will include the aggregate adjustment on the last line in this section. This amount will be a credit to the borrower, and is either zero or a negative number.
Each year, the lender must review each escrow account to ensure that the total funds in the borrower’s account reflects an accurate amount to pay for escrow items, and the amount should be within the limits required by RESPA. If there are any shortages in the account, the lender can make adjustments for future escrow payments to replace the shortage. If there are any overages, the borrower may request a refund of the amount of the overage.