How to Pay an Escrow Shortage on Your Mortgage

A mortgage escrow account is a dedicated fund managed by your lender to handle property-related expenses. Each month, a portion of your mortgage payment is allocated to this account to cover costs like property taxes and homeowner’s insurance premiums. An “escrow shortage” occurs when the amount held in this account is insufficient to cover these obligations.

What is an Escrow Shortage

An escrow shortage occurs when the funds collected by your mortgage servicer for property taxes and homeowner’s insurance are less than the actual amounts required. This means your escrow account has an insufficient balance for upcoming payments. Your servicer typically advances the necessary funds to cover the shortfall, which you then owe back.

Several factors commonly contribute to an escrow shortage. Property tax increases are a frequent cause, often resulting from a reassessment of your home’s value or changes in millage rates. Homeowner’s insurance premiums can also rise due to inflation, increased claims in your area, or policy changes. Sometimes, initial estimates made by the lender when establishing the escrow account are lower than actual expenses.

Homeowners are notified of an escrow shortage through an annual escrow analysis statement. This statement, required by federal regulations like the Real Estate Settlement Procedures Act (RESPA), details the account’s activity, projected payments, and any resulting shortage. The notification outlines the specific shortage amount, the reasons for its occurrence, and the available options for repayment. Lenders also maintain a cushion in the escrow account, often equivalent to two months of payments, to mitigate unforeseen increases.

Resolving an Escrow Shortage

Upon receiving an annual escrow analysis statement indicating a shortage, review the document. Examine the calculations for property taxes and insurance premiums to ensure accuracy and understand how the shortage was determined. This helps verify that the amounts align with any known changes in your tax assessments or insurance policies.

Payment Options

One common method to resolve an escrow shortage is making a lump-sum payment. This involves submitting a single payment to your mortgage servicer to cover the entire shortage amount. You can often make this payment through your lender’s online portal, by mailing a check, or by contacting their customer service department. Paying the full amount immediately brings your escrow account current. Even with a lump-sum payment, your future monthly mortgage payments may still increase if the underlying property taxes or insurance premiums have permanently risen.

Alternatively, most lenders offer the option to spread the shortage amount across your regular monthly mortgage payments over a specified period, typically the next 12 months. This approach divides the total shortage into smaller installments added to your existing mortgage payment. While this avoids a large upfront outlay, it results in a higher overall monthly payment for the duration of the repayment period.

Disputing a Shortage

If you believe the shortage calculation is incorrect, you have the right to dispute it. Contact your mortgage servicer directly to request a re-analysis of your escrow account. Be prepared to provide supporting documentation, such as official notices of lower tax assessments or updated homeowner’s insurance declarations. Clear communication and documentation can help resolve discrepancies and potentially adjust the shortage amount.

Strategies for Avoiding Future Shortages

To minimize future escrow shortages, stay informed about your local property tax assessments and rates. You can monitor these by checking your local government’s tax assessor or appraisal district websites, where property values and tax rates are often published annually. If you believe your property’s assessed value is too high, many jurisdictions provide a process for protesting the assessment, which could impact your tax liability.

Regularly review your homeowner’s insurance policy. Annual policy reviews allow you to check for significant premium increases and understand the reasons behind them. If premiums have risen substantially, consider obtaining quotes from other insurance providers to ensure competitive rates for comparable coverage.

Understand the details of your annual escrow analysis statement. Read through the statement carefully each year to verify projected expenses and account activity. This practice helps you anticipate potential changes to your mortgage payment and allows for early detection of any discrepancies.

Maintain open communication with your mortgage servicer. If you anticipate a significant change in your property taxes, such as after a major home renovation, or if you switch insurance providers, informing your lender can help them adjust your escrow contributions in a timely manner. This can help prevent a larger shortage from developing unexpectedly.