Escrow

Escrow is an arrangement in which a neutral third party holds money or documents until agreed conditions are met. In mortgage lending the word covers two things: the closing escrow that manages the purchase, and the ongoing account that collects taxes and insurance with each payment.

The ongoing escrow is why taxes and insurance are part of PITIA. On the $500,000 example, $6,000 in taxes and $2,500 in insurance add about $708 a month to the $2,622 principal and interest payment, bringing the total to about $3,330.

Whether or not a lender escrows, DSCR is calculated on the full payment including taxes and insurance. When annual tax or insurance bills rise, the escrow payment rises with them and the ratio falls, even though the loan has not changed.

Further reading: Escrow on Wikipedia.