What Is Aggregate Adjustment on Closing Disclosure?

The Closing Disclosure is a standardized document provided to consumers in real estate transactions involving a mortgage. This form details all the final costs and terms of the loan, including various fees and charges associated with purchasing a home. Among the many line items, a specific entry known as the aggregate adjustment plays a particular role in managing initial escrow payments. This article will explain what the aggregate adjustment is and why it appears on the Closing Disclosure.

Understanding the Aggregate Adjustment

The aggregate adjustment appears as a credit to the borrower on the Closing Disclosure. Its main purpose is to prevent lenders from collecting excessive amounts for the initial setup of an escrow account. An escrow account, in the context of a mortgage, serves as a holding place for funds collected by the lender to pay future property-related expenses on behalf of the homeowner. These expenses commonly include property taxes and homeowners’ insurance premiums.

Federal law, specifically the Real Estate Settlement Procedures Act (RESPA), governs the amount a lender can require for initial escrow deposits. RESPA limits the amount lenders can collect at closing for escrow to a specific cushion, which cannot exceed one-sixth of the estimated total annual disbursements, equivalent to two months of escrow payments for each item. The aggregate adjustment arises when the total amount collected for the initial escrow deposit exceeds this legally permitted cushion, returning the excess to the borrower.

The Calculation Method

The calculation of the aggregate adjustment directly relates to the escrow cushion limits set by RESPA. Lenders are permitted to collect up to two months’ worth of payments for each escrow item, such as property taxes and homeowners’ insurance, in addition to the amounts needed to cover disbursements before the next scheduled payment from the borrower. The aggregate adjustment represents any amount collected at closing that goes beyond this allowed cushion.

To illustrate, consider a scenario where monthly property tax payments are $300 and monthly homeowners’ insurance premiums are $100. The annual disbursements would be $3,600 for taxes and $1,200 for insurance. RESPA permits the lender to collect enough funds to cover upcoming disbursements plus a two-month cushion for each item. If the lender collects an initial deposit that, when combined with the first few months of regular payments, results in more than the allowed cushion, an aggregate adjustment is necessary. For example, if the lender collects 15 months of property taxes for the initial escrow deposit when only 12 months plus a 2-month cushion (totaling 14 months) is permissible, the one-month excess of $300 would become the aggregate adjustment.

This adjustment is presented as a credit because it signifies money the lender would have collected from the borrower beyond what federal regulations allow for establishing the initial escrow account balance. It corrects an overcollection of funds at closing.

Locating and Interpreting the Adjustment on the Closing Disclosure

The aggregate adjustment is specifically identified on Page 2 of the Closing Disclosure form. Borrowers can find this entry in Section H, labeled “Other Credits.” It is listed on Line H05. This placement clearly indicates that the aggregate adjustment is a financial benefit to the borrower, reducing the total amount of cash needed to close the loan.

The amount shown on this line will appear as a positive value, signifying a credit. A positive figure means that money is being returned to the borrower, thereby lowering their “Cash to Close” figure. This credit directly reduces the funds the borrower must bring to the closing table. The presence of an aggregate adjustment confirms that the lender initially collected more for the escrow account setup than allowed by federal guidelines. Understanding this line item helps borrowers recognize how their closing costs are being finalized. It provides transparency regarding the escrow account’s initial funding.

What to Review and Ask About

Borrowers should carefully review the aggregate adjustment amount on their Closing Disclosure. It is advisable to compare the initial escrow deposit amounts listed with the understanding of the RESPA cushion limits. While the calculation can be complex, borrowers can verify that the amount collected for escrow does not appear excessively high for the initial setup. If the aggregate adjustment amount seems incorrect or if its presence is unclear, borrowers should not hesitate to ask for clarification.

Questions can be directed to the loan officer who originated the mortgage, the lender’s closing department, or the settlement agent, such as the title company representative or closing attorney. These professionals can explain the specific calculation and provide reassurance about its accuracy. Ensuring a thorough review of the entire Closing Disclosure, including this adjustment, before signing is an important step in the homebuying process.