My Escrow Balance Is Negative, What Should I Do?

A mortgage escrow account serves as a dedicated holding place for funds your lender collects to pay property-related expenses on your behalf. These accounts are typically established to manage payments for property taxes and homeowners insurance, ensuring these significant bills are paid accurately and on time. A portion of your regular monthly mortgage payment is allocated to this account, creating a reserve for these future obligations. While generally a convenience, homeowners sometimes receive a notice indicating a “negative escrow balance,” which can be an unexpected and concerning development.

What a Negative Escrow Balance Means

A negative escrow balance indicates the amount in your escrow account is insufficient to cover property taxes and/or insurance premiums paid by your mortgage servicer. This means the account has been overdrawn, and your lender has advanced funds to cover these expenses. This situation is often called an “escrow shortage” or “escrow deficiency,” creating a deficit you are responsible for repaying.

A negative balance implies your lender requires repayment of this shortage. Your mortgage servicer conducts an annual escrow analysis to review account activity and project future expenses. If a negative balance is identified, the analysis shows the shortage amount. To resolve this, your lender will increase your future monthly mortgage payments, covering the shortage (usually over 12 months) and ensuring enough funds for upcoming tax and insurance bills.

Why Escrow Balances Become Negative

Escrow accounts can fall into deficit primarily due to changes in property tax and homeowners insurance costs.

Increases in property taxes are a common reason. Local governments periodically reassess property values, and if your home’s assessed value rises, your tax bill will likely increase. Tax increases can also stem from changes in local tax rates or home improvements. If your lender’s initial tax estimates were too low or taxes jumped unexpectedly, a shortfall can occur.

Homeowner’s insurance premium increases also contribute to negative balances. Insurance costs can rise due to severe weather events, higher building material and labor costs, and general inflation. Broad market trends and increased risk assessments by insurers can lead to higher premiums. If your insurer raises your premium and your monthly escrow contributions are not adjusted, the account may not have enough money when the premium is due.

Initial miscalculations or administrative errors by the mortgage servicer can also lead to deficits. The initial estimated escrow amount might have been too low. Timing differences can also cause temporary deficits, particularly in the first year of a mortgage, when large annual payments may be due before sufficient monthly contributions have accumulated.

Steps to Resolve a Negative Balance

Upon receiving notification of a negative escrow balance, review your annual escrow analysis statement. This document, provided by your mortgage servicer, details payments made from your escrow account for taxes and insurance, amounts collected, and projected expenses for the upcoming year. Reviewing this statement helps you understand the exact figures and the specific causes of the shortage.

Contact your mortgage lender to discuss the negative balance. This allows you to confirm figures, understand the reason for the shortage, and explore repayment options.

Lenders offer a few ways to resolve an escrow shortage. You can pay the entire shortage in a lump sum. This one-time payment immediately brings your escrow account to a positive balance and prevents a prolonged increase in monthly payments.

If a lump sum is not feasible, lenders allow you to spread repayment over 12 months. The shortage amount is divided by 12 and added to your regular monthly mortgage payment. Even if you pay the shortage in full, your monthly payments may still increase if underlying tax or insurance costs have permanently risen.

Managing Your Escrow for the Future

Proactively managing your escrow account can minimize future negative balances. Review your annual escrow analysis statement each year. This statement projects upcoming tax and insurance expenses and shows how monthly payments are calculated. Understanding this analysis helps you anticipate changes to your monthly payment and identify discrepancies.

Track your property tax assessments and homeowners insurance renewals. Property tax information is available from your local taxing authority, and insurance premium details are provided by your insurer. Monitoring these costs allows you to anticipate increases and compare them against your lender’s projections.

If you notice a significant change in your property value assessment or insurance premium, communicate this to your mortgage servicer. This helps your lender adjust escrow contributions more accurately, potentially preventing a future shortage. Some homeowners also set aside an emergency fund for potential escrow shortfalls.