Why Is My Escrow Short and What Can I Do About It?
Uncover common reasons for an escrow shortage in your mortgage and explore straightforward solutions to manage your account effectively.
An escrow account, established by a mortgage lender, serves as a dedicated holding fund for specific property-related expenses. Its main purpose is to collect and disburse funds for recurring costs such as property taxes and homeowner’s insurance premiums. Each month, a portion of the homeowner’s mortgage payment is allocated to this account. An escrow shortage occurs when the funds accumulated in this account are insufficient to cover the actual amounts needed for these disbursements.
How Escrow Shortages Occur
Escrow shortages frequently arise from increases in property taxes and homeowner’s insurance premiums. Property tax increases can stem from various factors, including local government reassessments of property values. These reassessments often occur periodically and can reflect an increase in market values or improvements made to the property. Local government spending decisions or changes in tax rates can also lead to higher property tax bills.
Homeowner’s insurance premiums can also increase, contributing to an escrow shortage. Factors influencing these increases include policy renewals, changes in coverage, or a history of claims. Rising construction costs, inflation, and an increase in severe weather events leading to more frequent and costly claims can drive up insurance rates.
Another common cause of an escrow shortage is an initial underestimation of costs by the lender. Lenders estimate future tax and insurance expenses to determine the initial monthly escrow payment. If these projections are too low, the account may not collect enough funds to meet actual, higher costs when they come due. This can be particularly true for new construction homes, where initial tax assessments might only reflect the land value, leading to a significant increase once the completed home is assessed.
The Escrow Analysis Process
Lenders identify and communicate an escrow shortage through a mandatory annual review known as the escrow analysis. Federal regulations, specifically the Real Estate Settlement Procedures Act, require servicers to conduct this analysis at least once a year. This review reconciles actual funds disbursed from the escrow account for taxes and insurance against amounts collected, and projects future expenses.
During the analysis, lenders use current information, such as actual tax bills and insurance premium notices, to determine amounts paid and projected for the coming year. The resulting escrow analysis statement provides a detailed breakdown. This statement includes a summary of the account’s activity over the past 12 months, showing payments made into and out of the account, along with projected disbursements for the next 12 months.
The statement also indicates whether there is a surplus, shortage, or deficiency in the account, and how this will affect the borrower’s future monthly payments. Homeowners usually receive this annual escrow analysis statement around the anniversary of their mortgage loan or at a consistent time each year.
Addressing an Escrow Shortage
Upon receiving an escrow analysis statement indicating a shortage, homeowners have options to address the deficit. One approach is to pay the entire shortage amount in a single lump sum directly to the lender, bringing the escrow account balance up to the required level.
Alternatively, the shortage amount is divided by 12 and added to the homeowner’s monthly mortgage payments for the upcoming year. This allows the homeowner to gradually repay the shortage over a 12-month period. Even if the shortage is paid in full, the monthly escrow payment may still increase to account for the higher projected tax and insurance costs for the coming year.
Homeowners should carefully review their annual escrow analysis statement. If there are questions regarding calculations, projected disbursements, or the reason for the shortage, contacting the lender for clarification is advisable. This review helps ensure the accuracy of the shortage calculation and provides an opportunity to discuss the available repayment options.