What Happens If Your Escrow Is Short?

An escrow account serves as a dedicated holding place for funds related to your home, specifically for property taxes and homeowner’s insurance premiums. Managed by your mortgage servicer, this account ensures these significant annual or semi-annual expenses are covered on time. A portion of your regular monthly mortgage payment is allocated to the escrow account, allowing you to pay these costs in smaller, more manageable increments throughout the year rather than facing large lump sums. An escrow shortage occurs when the money collected in this account is insufficient to meet the upcoming obligations for these property-related expenses.

What an Escrow Shortage Means

This deficit means that the funds set aside monthly have not kept pace with the actual costs of these expenses. Several factors can contribute to an escrow shortage. A primary reason is an increase in property taxes, which can happen due to local reassessments of your home’s value or the implementation of new community levies.

Similarly, an increase in homeowner’s insurance premiums frequently leads to a shortage. These premium hikes can stem from various factors, including a rise in the cost of materials and labor for repairs, an increase in claims in your area, or broader inflationary pressures.

Sometimes, the initial estimates for property taxes or insurance costs made when your mortgage was originated might have been too low, resulting in an underfunded account from the start. Changes in local tax rates or a shift in insurance policies without proper adjustment to escrow contributions can also create a shortfall.

How Shortages are Identified

Mortgage servicers regularly review escrow accounts to ensure sufficient funds are available for upcoming payments. This process, known as an annual escrow analysis, occurs annually.

During this analysis, the servicer compares the amount collected in your escrow account with the actual disbursements made for taxes and insurance over the past year, as well as projected costs for the next 12 months. If this review reveals that the funds collected were less than what was needed, or if future projected costs are higher, an escrow shortage is identified.

Once a shortage is determined, your mortgage servicer will send you a notification, often in the form of a letter or statement. This communication details the amount of the shortage and usually explains the reasons behind it, such as increases in property taxes or insurance premiums.

The notice will also outline the proposed methods for resolving the deficit. A common outcome of an identified shortage is an adjustment to your monthly mortgage payment, which will increase to cover the deficit and adequately fund the account for future anticipated expenses.

Options for Addressing a Shortage

When notified of an escrow shortage, homeowners have choices for resolution provided by their mortgage servicer. One common option is to pay the entire shortage amount in a single lump sum. This one-time payment immediately brings the escrow account balance to the required level, preventing the shortage from being spread across future monthly payments. Even if you pay the full shortage upfront, your monthly mortgage payment may still increase if the underlying property taxes or insurance premiums have risen.

The most frequent alternative is to have the shortage amount spread out and added to your regular monthly mortgage payments. This repayment period is typically over 12 months, increasing your monthly mortgage obligation for that duration. While 12 months is standard, some servicers may allow the repayment period to be extended to alleviate financial burden. These options are presented in the escrow shortage notification, allowing you to choose the method best suited to your financial situation.

Understanding Your Escrow Statements

Monitoring your escrow account through regular review of your statements can help you anticipate changes. Your mortgage servicer is required to provide an annual escrow statement, detailing activity within your account over the past year and projecting future payments. On these statements, you should look for key information such as the beginning and ending balances, the specific payments made for property taxes and insurance, and the new estimated annual costs for these items.

It is also beneficial to independently track potential changes in your property taxes by checking with your local county auditor’s website or tax assessor’s office for reassessments. Similarly, staying informed about changes in homeowner’s insurance premiums by contacting your insurance agent or shopping around for new quotes can help you anticipate future escrow adjustments. If you notice any discrepancies on your escrow statement or have questions about projected costs, contacting your mortgage servicer promptly is advisable to clarify the information.