Why Do I Have a Negative Escrow Balance?

A negative escrow balance indicates that the funds in your escrow account are insufficient to cover property-related expenses. Understanding the reasons and solutions is important for managing home finances. This article clarifies what a negative escrow balance means and how homeowners can address it.

Understanding Your Escrow Account

An escrow account is established by your mortgage lender to manage specific property-related costs. Its primary purpose is to hold funds collected as part of your monthly mortgage payment to cover property taxes and homeowners insurance premiums. This arrangement ensures these bills are paid on time.

Each month, a portion of your mortgage payment is deposited into this account. When property tax bills or insurance premiums become due, your lender uses the accumulated funds to make these payments.

Lenders conduct an annual escrow analysis to review the account’s activity and project future expenses. This analysis compares the actual amounts paid out for taxes and insurance with the amounts collected from your monthly payments. Based on this review, your lender determines if the current monthly contributions are adequate or if adjustments are needed for the upcoming year.

Common Causes of a Negative Balance

A negative escrow balance, also known as an escrow deficiency, occurs when the funds in your account are not enough to cover the required payments. This most frequently arises due to unanticipated increases in property taxes or homeowners insurance premiums.

Property tax increases can stem from various factors, including a reassessment of your property’s value, new levies imposed by local governments, or general increases in property values. Significant home improvements can also lead to a higher assessed value, increasing your property tax obligations. If you recently purchased your home, the property’s taxable value may “uncap” and reset to a higher amount, leading to a substantial tax increase in the year following the sale.

Homeowners insurance premiums can rise due to several reasons, such as an increase in the cost of building materials and labor. An increase in severe weather events and natural disasters also contributes to higher insurance costs. Changes in risk factors for your area, or even adjustments to your coverage limits, can also lead to increased premiums.

Sometimes, the initial estimation or calculation of property taxes and insurance premiums when your loan was originated may have been too low. This underestimation can lead to a gradual depletion of the escrow account over time, eventually resulting in a negative balance. While less common, delays or errors in the lender’s disbursement of funds for taxes or insurance could also contribute to a shortage.

Resolving an Escrow Shortage

When an escrow shortage is identified, your mortgage lender will notify you through an annual escrow analysis statement. This statement outlines the current balance, projected disbursements, and the shortage amount. It also details any adjustments to your monthly mortgage payment to address the deficit.

Homeowners have two main options for resolving an escrow shortage. The first is to pay the full shortage amount in a single, lump-sum payment directly to your mortgage company. This immediate payment brings your escrow account back to a positive balance and prevents the shortage from being spread across your future monthly payments.

The second option is to spread the shortage amount over a set period, typically 12 months, by increasing your monthly mortgage payment. Your lender will automatically adjust your payment to include the regular principal, interest, and new escrow amount, plus an additional portion to cover the shortage. This approach allows you to manage the additional cost over time rather than paying a large sum upfront.

It is prudent to review your lender’s escrow analysis statement carefully and compare it with your personal property tax bills and insurance premium notices. Verifying the accuracy of the amounts disbursed and projected can help identify any discrepancies. If you notice errors or have questions about the analysis, contacting your lender for clarification is a sensible step.