What Happens If My Escrow Is Negative?
Navigate a negative mortgage escrow balance. Explore common causes and gain clear insights into managing and resolving account shortages.
An escrow account is a financial arrangement where a neutral third party, typically your mortgage servicer, holds funds to pay property-related expenses on your behalf. These accounts ensure that property taxes and homeowners insurance premiums are paid on time, protecting both your investment and the lender’s interest in the property. A portion of your monthly mortgage payment is specifically allocated to fund this account, spreading the cost of these large annual and semi-annual bills into more manageable installments.
A “negative escrow balance,” also known as an escrow deficiency, means the funds in your escrow account are insufficient to cover the required payments for property taxes and insurance. This situation indicates that your mortgage servicer has advanced money from their own funds to cover these bills because your account did not have enough to pay them. While finding your escrow account in arrears can be concerning, it is a common occurrence for homeowners and is a manageable situation.
Reasons for a Negative Escrow Balance
A negative balance in an escrow account primarily stems from increases in the costs it covers, such as property taxes or homeowners insurance premiums. Local tax assessments can rise due to increasing property values, new developments, or increased local government budgetary needs for public services. These changes can cause initial property tax projections to be lower than the actual amount due.
Homeowners insurance premiums may also increase due to inflation, rising material and labor costs for repairs, or increased claims within a specific geographic area from natural disasters. Changes in home age, features, or neighborhood crime rates can also lead to higher insurance costs. Sometimes, initial estimates for taxes and insurance at loan closing might be underestimated, leading to a later shortage.
Impact of a Negative Escrow Balance
When an escrow account develops a negative balance, your mortgage servicer typically sends a deficiency notice or an annual escrow analysis statement. This document details the shortage amount and explains how it occurred. The lender already paid the property taxes or insurance premiums on your behalf, even though your account had insufficient funds.
To resolve the negative balance, lenders generally offer options. You can pay the entire shortage in a single lump sum. Alternatively, the mortgage servicer might spread the shortage over a period, typically 12 months, by adding an incremental amount to your monthly mortgage payment. This increased monthly payment also includes a new, higher escrow contribution based on updated projections for property taxes and insurance.
Addressing a Negative Escrow Balance
Upon receiving notification of a negative escrow balance, carefully review the deficiency notice and accompanying escrow analysis statement. This review helps you understand the specific disbursed amounts and how the shortage was calculated. Comparing current tax and insurance figures to previous projections clarifies the source of the shortfall.
Contact your mortgage servicer to discuss the shortage and confirm resolution options. You can inquire about the exact amount needed for a lump sum or verify how increased monthly payments will be calculated. Many lenders provide convenient payment methods, such as online portals, phone payments, or mailing a check. If you choose to make a lump sum payment, your monthly payment will adjust to reflect shortage elimination.
Regardless of how you address the current deficit, the mortgage servicer will recalculate your monthly escrow payment. This recalculation uses new, higher projections for property taxes and insurance to ensure sufficient funds are collected moving forward. The goal is to prevent similar shortages in the future by adjusting contributions to match anticipated expenses.
Understanding Your Escrow Analysis
Your mortgage servicer sends an annual escrow analysis statement, providing a comprehensive review of your escrow account’s activity and projected needs. This statement details the accounting of your funds and ensures the amount collected each month is appropriate for covering expected property taxes and insurance premiums.
The statement typically includes several key components: the previous escrow balance, a summary of payments received, itemized disbursements for property taxes and insurance, the projected account balance for the upcoming year (indicating any shortage), and your new monthly escrow payment. Reviewing these sections allows you to see how past payments and disbursements led to the current balance and how your future payments are being adjusted.