How do you handle trial payments and escrow accounts in a permanent modification agreement?

1 What are trial payments and escrow accounts?

Before a borrower can sign a PMA, they usually have to complete a trial period of three or four months, during which they have to make reduced payments on time. These payments are called trial payments, and they are used to verify the borrower's ability and willingness to pay the modified loan. The trial payments are not applied to the principal or interest of the loan, but are held in a separate account called an escrow account. An escrow account is a third-party account that holds funds for a specific purpose, such as taxes, insurance, or trial payments.

2 How do you calculate trial payments?

The amount of the trial payments depends on the terms of the PMA and the borrower's income and expenses. The trial payments are usually equal to the modified monthly payment, or a percentage of the borrower's gross monthly income, whichever is lower. For example, if the PMA reduces the monthly payment from $2,000 to $1,500, and the borrower's gross monthly income is $4,000, the trial payment would be $1,200 (30% of $4,000). To calculate the trial payments, you need to use a PMA calculator, which is a tool that helps you input the relevant data and generate the trial payment amount.

3 How do you handle escrow accounts?

The escrow account is opened by the servicer, who is the company that collects and manages the mortgage payments. The servicer is responsible for depositing the trial payments into the escrow account, and releasing them to the lender once the PMA is signed. The servicer also has to provide the borrower with monthly statements that show the balance and activity of the escrow account. The borrower has to keep track of the escrow account and make sure that the trial payments are credited correctly. If there are any errors or discrepancies, the borrower has to notify the servicer immediately.

4 What are the benefits of a PMA?

A PMA can offer several benefits to both the borrower and the lender. For the borrower, a PMA can lower the monthly payment, reduce the interest rate, extend the loan term, or forgive some of the principal balance. This can make the loan more affordable and manageable, and prevent the borrower from losing their home. For the lender, a PMA can reduce the risk of default and foreclosure, which can be costly and time-consuming. A PMA can also preserve the relationship with the borrower and maintain the value of the loan.

5 What are the challenges of a PMA?

A PMA is not a simple or easy process. It involves a lot of paperwork, documentation, communication, and coordination between the borrower, the servicer, and the lender. The borrower has to provide proof of income, expenses, hardship, and other relevant information. The servicer has to review the borrower's eligibility, calculate the trial payments, set up the escrow account, and monitor the trial period. The lender has to approve the PMA terms, accept the trial payments, and sign the PMA contract. Any delays, errors, or misunderstandings can jeopardize the success of the PMA.

6 Here’s what else to consider

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