Understanding and Managing Escrow Shortages

When you purchase a home, your lender typically sets up an escrow account to manage the funds needed for your property taxes and homeowners insurance. Each month, a portion of your mortgage payment is directed into this escrow account to ensure there are sufficient funds to cover these expenses when they come due. However, there are instances where you might encounter an escrow shortage. This blog will delve into what an escrow shortage is, its causes, how to resolve it, and tips to avoid it in the future.

What Is an Escrow Shortage?

An escrow shortage occurs when the funds in your escrow account are insufficient to meet the minimum requirement for your estimated future taxes and insurance. Even if there is money in the account, it is considered short if it cannot cover your property tax and insurance bills. In contrast, an escrow deficiency means your account has a negative balance, which can happen if your lender has to cover the shortfall for your tax and insurance payments.

On the flip side, you might also experience an escrow surplus. This happens when your tax or insurance costs are lower than expected, leaving extra funds in your escrow account. Many lenders will leave the surplus in your account if it is below a certain threshold, such as $50. If it exceeds this amount, they may send you a refund check.

What Causes an Escrow Shortage?

Escrow shortages often arise from increases in property taxes or homeowners insurance premiums. For example, if your annual property taxes are $2,000, approximately $167 of your monthly mortgage payment will be allocated to your escrow account for this purpose. Similarly, if your homeowners insurance costs $1,200 annually, another $100 will be directed to your escrow account each month.

If your monthly mortgage payment is $1,500, $1,233 will cover your principal and interest, while the remaining $267 will go into your escrow account. However, if your property taxes increase to $3,000 per year and your insurance rises to $1,500, this represents a $1,300 overall cost increase, potentially leading to an escrow shortage.

How to Fix an Escrow Shortage

When your mortgage servicer completes an escrow analysis and identifies a shortage, they will send you a report outlining the shortage amount. You typically have three options to address this shortage:

1. Pay the Full Shortage Now

You can choose to pay off the entire shortage in one lump-sum payment to balance your escrow account. However, even if you pay the shortage, your monthly mortgage payment may still increase if your property tax or insurance costs have risen.

2. Pay the Shortage Over the Next 12 Months

If paying the full shortage upfront is not feasible, you can spread the shortage amount over your monthly payments for the next year. This involves dividing the shortage by 12 and adding the resulting figure to your monthly mortgage payments.

3. Pay Part of the Shortage Now, and the Rest Over the Next 12 Months

This option allows you to make a partial payment upfront to reduce your escrow shortage and then spread the remaining balance over the next 12 months. This approach combines the benefits of the previous two options, making it more affordable for some homeowners.

How to Avoid an Escrow Shortage

While it may be challenging to completely avoid an escrow shortage, staying informed about changes to your property taxes and homeowners insurance rates can help you prepare for potential increases. Understanding how your property taxes are calculated can also help you anticipate changes and budget accordingly.

If you know that taxes and insurance costs are rising, consider adding extra money to your escrow account ahead of time to cover the anticipated higher bills. Additionally, if your expenses tend to increase annually, making higher monthly escrow payments can help you stay ahead of potential shortages.

The Bottom Line

Having a mortgage often means having an escrow account to manage your property taxes and insurance payments. If these costs increase, you might face an escrow shortage, which can be resolved by paying the shortage amount in one lump sum, spreading it out over a year, or a combination of both. Staying on top of your mortgage and escrow payments is crucial for your financial health.

At O1ne Mortgage, we understand the complexities of managing your mortgage and escrow accounts. If you have any questions or need assistance with your mortgage services, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your mortgage needs and ensure your financial well-being.

Remember, maintaining your credit health is just as important as managing your mortgage. Free credit monitoring services can help you keep track of changes to your credit report and stay informed about your financial status.

For all your mortgage service needs, trust O1ne Mortgage to provide the guidance and support you need. Contact us today at 213-732-3074 and let us help you achieve your homeownership goals.