Why Is My Escrow Account Negative? What to Do About It

A negative balance in your mortgage escrow account can be a source of confusion and concern for homeowners. This situation indicates that the funds held to cover property-related expenses are insufficient. Understanding why this occurs and how to address it is important for maintaining financial stability related to your home.

Basics of an Escrow Account

An escrow account serves as a holding place for funds, managed by your mortgage servicer, to pay specific property-related expenses on your behalf. These typically include property taxes, homeowner’s insurance premiums, and sometimes private mortgage insurance (PMI) or flood insurance. Its purpose is to ensure these costs are paid on time, protecting your investment and the lender’s security.

Each month, a portion of your regular mortgage payment is allocated to this escrow account. This breaks down large, infrequent bills into smaller, manageable monthly contributions. The mortgage servicer collects these funds and disburses them to the appropriate taxing authorities and insurance providers when payments are due. Annually, lenders conduct an escrow analysis, reviewing the previous year’s activity and projecting the costs for the upcoming 12 months to ensure sufficient funds are collected.

Reasons for a Negative Balance

A negative escrow balance, often termed an “escrow shortage” or “deficiency,” occurs when the amount paid into the account is less than the actual expenses disbursed. One common cause is an increase in property taxes. Local tax authorities periodically reassess property values, and if your home’s assessed value rises, your property taxes will also increase, impacting the funds needed in escrow. New levies or changes in tax rates by local jurisdictions to fund public services can also lead to higher tax bills.

Another frequent reason for a shortage is an increase in homeowner’s insurance premiums. Insurance companies may raise rates due to increased claims in your area, general inflation, or the rising cost of repairs and replacements. Even without filing a claim, policy renewals can result in higher premiums, meaning the initially estimated escrow contributions may no longer be adequate.

Sometimes, the negative balance stems from lender errors or miscalculations during the initial escrow setup or annual analysis. An underestimation of future expenses can lead to a shortfall. Processing errors, such as misapplying payments or failing to properly account for changes, can also contribute to an unexpected deficit.

Unexpected or supplemental bills, like those issued after a property reassessment post-purchase or significant improvements, may not have been initially factored into the escrow analysis, requiring additional funds.

Consequences of an Escrow Shortage

When an escrow account shows a negative balance, it means the mortgage servicer has advanced funds to cover your property taxes and insurance premiums. Your lender will require you to repay this shortfall. Repaying this shortfall prevents the lender from incurring losses and ensures the account has a sufficient cushion for future payments.

Lenders typically offer two main methods for resolving an escrow shortage. One option is to make a lump-sum payment to cover the entire deficit at once. This approach immediately brings the account back to a positive or zero balance. The other method involves spreading the shortage amount over a specified period, usually 12 months, by adding it to your regular monthly mortgage payments. Even if you pay the shortage in full, your monthly mortgage payment may still increase due to the underlying rise in property taxes or insurance premiums that caused the shortage.

Steps to Take When Your Escrow is Negative

Upon receiving notification of a negative escrow balance, reviewing your annual escrow statement is the first step. This statement provides a breakdown of your account’s activity, including the amounts collected and disbursed for taxes and insurance, and will typically highlight the reasons for the shortage. Understanding which expenses increased, such as property taxes or insurance premiums, helps clarify the situation.

Gather supporting documents like your property tax bill and homeowner’s insurance declaration page. Comparing these actual bills with the figures on your escrow statement can identify discrepancies or confirm the increased costs. This documentation is valuable for discussions with your lender.

Contact your mortgage servicer promptly when an escrow shortage is identified. Ask for a detailed explanation of the shortage and inquire about repayment options. Understanding whether a lump-sum payment or an increased monthly payment plan aligns with your financial situation is key.

If you believe there is an error in the lender’s calculation, you have the right to dispute it. This involves sending a written notice of error to your servicer, providing relevant details and supporting documentation. The Real Estate Settlement Procedures Act (RESPA) provides guidelines for how servicers must respond to such inquiries.