What Happens If My Escrow Balance Is Negative?

An escrow account, managed by your mortgage servicer, holds a portion of your monthly mortgage payment to cover property taxes and homeowners insurance premiums. A “negative escrow balance,” often called an “escrow deficiency,” means the account has insufficient funds for upcoming payments. This indicates the servicer may have advanced funds on your behalf, resulting in you owing money to bring the account current.

Understanding Escrow Account Imbalances

An escrow account can develop a negative balance due to several common factors, primarily unforeseen increases in property-related expenses. An increase in local property taxes, from county reassessments or new levies, can directly raise your annual tax bill. When the actual tax amount exceeds the servicer’s projection, a shortage occurs.

Homeowner’s insurance premiums also contribute to escrow imbalances. Premiums can increase due to inflation, rising replacement costs for homes, or an increase in the number of claims in your area, such as those related to natural disasters. If your insurance premium rises after your annual escrow analysis, the amount collected monthly may no longer be sufficient.

Initial miscalculations by the mortgage servicer when setting up the escrow account can also lead to a negative balance. Sometimes, the initial estimated expenses for taxes and insurance are underestimated. For instance, if a newly constructed home’s initial tax assessment only considers the land value, a higher assessment after the home is completed will result in a larger tax bill than anticipated.

Unexpected increases in municipal or utility assessments that are included in escrow can also contribute to a shortfall. While less common than tax or insurance increases, these additional charges can create a deficit if not properly anticipated and accounted for in the monthly escrow collection. If funds from a previous analysis were missing or if you switched insurance policies mid-year without sending a refund check to your servicer, it could also throw off the account balance.

Consequences of a Negative Escrow Balance

When an escrow account has a negative balance, it is categorized as an “escrow deficiency.” This signifies that the mortgage servicer has paid out more money for your property taxes and insurance than what has been collected in your escrow account. This situation means you owe the servicer for the funds they advanced on your behalf.

Mortgage servicers are legally obligated by the Real Estate Settlement Procedures Act (RESPA) to conduct an annual escrow account analysis. This analysis reviews the account activity from the previous 12 months and projects expenses for the upcoming year. The servicer must provide you with an annual escrow analysis statement within 30 days of completing this review.

The primary consequence of an escrow deficiency is an increase in your monthly mortgage payment. This increase serves two purposes: to cover the existing negative balance and to adjust for anticipated higher expenses in the future. Even if you have a fixed-rate mortgage, the portion of your payment allocated to escrow can fluctuate, causing your total monthly payment to rise. The servicer will factor the deficiency into your new monthly payment, typically spreading the repayment over a 12-month period to gradually eliminate the shortfall and ensure sufficient funds for future disbursements.

Resolving an Escrow Shortage

Addressing an escrow shortage begins with a thorough review of the annual escrow analysis statement provided by your mortgage servicer. This statement details the account’s history, including past expenses paid and projected future costs for property taxes and insurance. Examining this document helps you understand the calculations and identify any discrepancies or unexpected changes that led to the shortage.

Homeowners typically have two primary options for resolving an escrow deficiency. The first option is to make a lump-sum payment to cover the entire outstanding balance. This immediate payment brings your escrow account current and avoids an increase in your regular monthly mortgage payments for the shortage portion.

The second and more common option is to have the shortage amortized and added to your regular monthly mortgage payments over a 12-month period. This means your total monthly mortgage payment will increase for the next year to gradually replenish the escrow account. Even if you choose the lump-sum payment, your future monthly escrow payments may still increase if the underlying property taxes or insurance premiums have risen.

Communication with your mortgage servicer is important if you find an escrow shortage. You can contact them to seek clarification on the analysis, dispute any potential errors in their calculations, or discuss the payment options available to you. Acting promptly is important to avoid potential issues, as ignoring a shortage could lead to late payments or other financial complications.