What Are Overage and Shortage in a Mortgage?

Mortgage payments often include funds for an escrow account, sometimes called an impound account. This account manages property-related expenses on the homeowner’s behalf. While intended to simplify financial management, funds in these accounts don’t always perfectly align with actual costs, leading to overages or shortages.

Understanding Mortgage Escrow Accounts

A mortgage escrow account is a dedicated savings account managed by the mortgage lender or servicer. Its purpose is to collect and disburse funds for recurring property expenses, primarily property taxes and homeowners insurance premiums. Lenders require these accounts to ensure timely payments, protecting their financial interest in the property.

Funds are collected by adding a calculated amount to the homeowner’s regular monthly mortgage payment. This combined payment is submitted to the lender, who deposits the escrow portion into the separate account. As property tax bills and insurance premiums become due, the lender pays these obligations directly from the escrow account on the homeowner’s behalf. This system simplifies budgeting by breaking down large, infrequent expenses into smaller monthly contributions. The amounts collected are estimates based on anticipated costs for the upcoming year.

Federal regulations, such as the Real Estate Settlement Procedures Act (RESPA), govern how lenders manage these accounts. RESPA permits lenders to maintain a cushion in the escrow account, typically not exceeding one-sixth (two months) of the total annual disbursements. This cushion helps cover minor, unexpected increases in taxes or insurance without immediately triggering a shortage.

Defining Overage and Shortage

An “overage,” also known as a surplus, in a mortgage escrow account occurs when the amount of money collected from the homeowner and held in the account exceeds the actual expenses for property taxes, homeowners insurance, and other escrowed items. An overage results in an excess balance within the escrow account.

Conversely, an “escrow shortage” arises when the funds collected and held in the escrow account are insufficient to cover the actual expenses for property taxes, homeowners insurance, and other items paid from the account. A shortage indicates that the account balance is lower than what is needed to cover anticipated future payments, potentially falling below the required minimum cushion.

Common Causes of Overage and Shortage

Changes in property taxes are a frequent reason for escrow account imbalances. Annual reassessments of property values by local tax authorities can lead to increases in tax obligations. New levies, bond measures, or adjustments to local tax rates can also raise the amount due, causing a shortage if the escrow collection was based on lower previous figures.

Homeowners insurance premiums can also fluctuate, contributing to overages or shortages. Increases may stem from general inflation, a history of claims on the property, or policy changes initiated by the insurer. Conversely, a decrease in insurance premiums, perhaps due to a change in policy or discounts, could result in an overage.

Initial setup errors in the escrow account calculation can lead to discrepancies. If the lender’s initial estimate of property taxes or insurance premiums was too low, a shortage may develop later as actual costs exceed projections. Timing discrepancies can also play a role, as bills for taxes and insurance may be due at different times than initially projected, affecting the account’s running balance.

Lender Actions and Homeowner Options

Mortgage lenders perform an annual escrow analysis to review account activity and determine whether a surplus, shortage, or deficiency exists. This analysis compares collected funds against actual disbursements and projected costs for the next 12-month period. The Real Estate Settlement Procedures Act (RESPA) mandates that servicers conduct this analysis annually and provide the homeowner with an annual escrow account statement within 30 days of completion.

If an overage is identified, the lender typically handles it in one of two ways. If the surplus exceeds $50, the lender is required to refund the excess amount to the homeowner. If the overage is less than this threshold, the lender may apply it as a credit towards future escrow payments, which can temporarily reduce the homeowner’s monthly payment.

When a shortage is identified, the homeowner usually has options to address the deficit. One option is to pay the full shortage amount as a lump sum. This prevents an increase in the monthly mortgage payment due to the shortage, though the overall payment may still adjust for future cost projections. Alternatively, the lender often allows the homeowner to spread the shortage recovery over time, typically by increasing the monthly mortgage payment for the next 12 months. The lender is required to notify the homeowner of the results of the escrow analysis and any resulting changes to their monthly payment.