How to Fix an Escrow Shortage: Your Options Explained

An escrow account is a dedicated fund managed by your mortgage lender to cover specific property-related expenses, primarily property taxes and homeowners insurance. A portion of your monthly mortgage payment is allocated to this account, ensuring funds are available when these significant bills become due. This arrangement helps homeowners budget for large, infrequent expenses by spreading them across the year. The lender pays these bills on your behalf from the escrow account, reducing the risk of missed payments and potential issues like tax liens or lapsed insurance.

An escrow shortage occurs when the amount held in this account is insufficient to cover the property taxes and insurance premiums that are due.

Understanding an Escrow Shortage

An escrow shortage means the mortgage servicer has collected less money than needed to pay required expenses. The funds for escrow come directly from your monthly mortgage payment, with the amount determined by a yearly escrow analysis.

Increases in property taxes are a primary reason for shortages. Local governments periodically reassess property values, and if your home’s assessed value increases, your property tax bill will likely rise. New levies or changes in tax rates implemented by local authorities can also lead to higher tax obligations.

Increases in homeowners insurance premiums are another frequent cause. These premiums can go up due to general inflation, increased cost of repairs and materials, or a rise in claims within your geographical area. Switching insurance policies mid-year without properly accounting for premium differences or refunds can also lead to an imbalance.

Sometimes, an initial miscalculation by the lender during the previous escrow analysis contributes to a shortage. The anticipated amount to be collected is based on the prior year’s payments for taxes and insurance. If the previous year’s projection was too low, the account starts underfunded, leading to a deficit when actual bills arrive. If a shortage is identified, the mortgage servicer advances the missing funds to ensure timely payment of your property taxes and insurance premiums.

Analyzing Your Escrow Statement

Mortgage servicers conduct an escrow account analysis once a year to review past activity and project future needs, providing you with a detailed statement. This statement outlines the financial activity within your escrow account over the past 12 months and provides projections for the upcoming year.

When reviewing the statement, focus on the projected disbursements for property taxes and insurance premiums. These figures represent the lender’s estimate of the amounts that will be paid out from your escrow account in the coming year. Compare these projected amounts with the actual disbursements made in the prior year, which are also detailed on the statement. This comparison can reveal if a significant increase in taxes or insurance premiums is the underlying cause of the shortage.

The statement will also display your current escrow balance, indicating the amount of funds presently held in the account. The statement will clearly identify any escrow shortage or deficiency amount. This specific line item shows how much your account is below the required minimum balance needed to cover upcoming payments.

The Real Estate Settlement Procedures Act (RESPA) permits lenders to maintain a cushion in your escrow account, typically not exceeding one-sixth (or two months) of the total annual payments for taxes and insurance. This cushion helps absorb minor increases in expenses without immediately triggering a shortage.

Resolving an Escrow Shortage

You have defined options for resolving an escrow shortage. The most direct method is to make a lump sum payment to cover the entire shortage. This one-time payment is applied directly to your escrow account, immediately bringing the balance up to the required level. Paying the full amount before the effective date of the new escrow analysis can prevent the shortage from being added to your subsequent monthly mortgage payments.

Alternatively, you can allow the shortage amount to be spread out and added to your regular monthly mortgage payments. Lenders typically divide the shortage evenly over a specified period, most commonly 12 months. This means your monthly mortgage payment will temporarily increase by the shortage amount divided by 12, in addition to any adjustments for anticipated future increases in taxes and insurance.

To discuss these options, contact your mortgage lender or servicer directly. Be prepared with your loan number and a copy of your escrow statement, as this will facilitate a smooth conversation. You can inquire about the exact procedures for making a lump sum payment, such as online payment portals, mailing a check, or making a payment over the phone. If you choose the monthly repayment option, confirm the exact amount of the increase to your payment and the duration of this adjustment.

Even if you pay off the shortage in full, your monthly escrow payment may still increase for the upcoming year. This is because the shortage often indicates that the underlying costs of your property taxes and/or homeowners insurance have permanently risen. The new monthly escrow payment will be adjusted to reflect these higher ongoing expenses, aiming to prevent future shortages.

Managing Your Escrow Account

Proactively managing your escrow account is important for financial stability. Upon receiving your annual escrow statement, review it carefully. Compare the projected tax and insurance disbursements with your actual tax bills and insurance declarations. Verify that the amounts paid out match the bills you received, and that the projected amounts for the next year seem accurate based on any known changes.

Communicate with your lender about any anticipated changes to your property taxes or insurance premiums. For example, if you receive a notice of a property reassessment that indicates a significant change in your tax liability, informing your lender can help them adjust your escrow payments more accurately. Similarly, if you change homeowners insurance providers or policies, promptly provide your lender with the updated insurance declarations to ensure accurate premium payments from your escrow account.

If you believe there is an error in your escrow analysis or wish to have your account reviewed more frequently than annually, you can request an escrow analysis from your lender. This can be beneficial if you’ve made significant improvements to your home that might affect its assessed value, or if you’ve experienced a substantial change in your insurance coverage or premiums.