Why Do I Always Have an Escrow Shortage?
Unravel the mystery of recurring mortgage escrow shortages. Get clear insights into causes, analysis, and managing your account.
An escrow shortage occurs when funds in a mortgage escrow account are insufficient to cover required property taxes and insurance premiums. This means the amount collected from the homeowner through monthly mortgage payments has fallen short of the actual costs. Understanding why these shortages arise and how they are addressed helps homeowners manage their mortgage obligations.
The Basics of Escrow Accounts
A mortgage escrow account, managed by your lender, collects and disburses funds for homeownership expenses like property taxes and homeowner’s insurance premiums. This ensures these are paid on time, with a portion of your monthly mortgage payment allocated to the account instead of you paying directly.
Components held in escrow include property taxes, homeowner’s insurance, and sometimes flood insurance or private mortgage insurance (PMI). This helps homeowners budget for these significant, often annual, expenses by spreading the cost monthly. The lender pays these bills on your behalf using the accumulated funds.
Initial escrow payments are estimated based on anticipated annual costs. Lenders calculate the monthly contribution by dividing estimated annual property taxes and insurance premiums by twelve. An additional amount, typically two months of estimated payments, may be collected at closing to establish a reserve or “cushion” for potential increases.
Common Causes of Escrow Shortages
Escrow shortages occur due to increases in underlying costs like property taxes and homeowner’s insurance premiums. These external factors are often beyond a homeowner’s control, indicating past collections were insufficient to meet higher expenses.
Property tax increases are a common reason for shortages, resulting from reassessments, new levies, or general property value rises. For example, property tax bills increased by 27% between 2019 and 2024. If a home’s assessed value rises, the tax bill increases, leading to a potential shortage.
Homeowner’s insurance premiums also contribute to shortages when they increase. Rising costs stem from inflation, escalating building material and labor costs, and more frequent severe weather events like hurricanes, floods, and wildfires, which result in higher claims and rates.
Individual claims history or changes in neighborhood risk can also increase premiums. Lender miscalculations when setting up the account can also contribute to a shortage, particularly early in the loan term.
Understanding Your Annual Escrow Analysis
Mortgage lenders conduct an annual escrow analysis to ensure sufficient funds for upcoming property taxes and insurance premiums. This yearly review typically occurs around your mortgage loan’s anniversary, comparing past disbursements with collected payments and projecting expenses for the next twelve months.
The escrow analysis statement provides a detailed summary. It outlines your previous monthly mortgage payment, including the escrow portion, and itemizes actual amounts paid for taxes and insurance last year. It also presents projected payments for the upcoming year and the expected account balance.
The statement indicates whether your account has a surplus, shortage, or deficiency. It also shows the calculation of your new monthly escrow payment, adjusted to cover projected costs and any identified surplus or shortage.
Addressing an Escrow Shortage
Once an escrow shortage is identified through the annual analysis, your mortgage servicer will notify you via the annual escrow analysis statement. This notification details the shortage amount and presents resolution options.
Homeowners have two options to address an escrow shortage. The first is to pay the entire shortage in a single lump sum; if paid before a specified date, it won’t be added to future monthly payments. The second option is to spread the shortage amount across your regular monthly mortgage payments, typically over the next twelve months.
Even if you pay the shortage in full, your monthly escrow payment may still increase. This is because shortages often result from increased property taxes and insurance costs, necessitating higher ongoing contributions. Lenders can maintain a “cushion” in your escrow account, typically one-sixth of annual disbursements (about two months of payments), to cover minor increases or unexpected timing differences.