Escrow shortage, what is it? How do you fix it and how can you prevent?
What is escrow shortage? This is a very common among homeowners. Let’s start with a quick refresher, an escrow account is an account held with your servicer that holds the funds needed to pay your property taxes and homeowners insurance. An escrow account is set up at the time of your purchase and/or refinance. It is in your prepaid items (closing costs) on your loan. You then pay your escrows each month with your mortgage payment.
An escrow account is a service to you because it consolidates these payments to make just one payment a month rather than multiple payments due at different times. Every year there is an escrow analysis where your servicer will look at property taxes and your insurance to see if there are any changes/adjustments needed. If there is an adjustment you will get a notification in your mortgage statement by showing either a decrease or increase in your payment.
If there is an increase in your taxes and/or insurance then you can end up with an escrow shortage. This is where you still have a positive balance in your escrow account but you do not have enough funds to cover the new dues.
If you purchased a new build you will want to make sure to watch for your tax assessment. The reason for this is because when you purchased there was no home built to assess, only the land. This can at many times cause an escrow shortage because the taxes used were estimated and typically are underestimated.
How can you fix & how can you prevent this from happening? You will want to pay close attention when you get your tax assessment from the county. You should be aware of the assessed property value and if it has increased from the previous year or from your purchase. You will also need to keep an eye out for any information your homeowner’s insurance sends to you. Double check if your premium has increased. If you see that anything has changed plus/minus, you will want to call your servicer and ask for an escrow analysis.
Should you be short then you know your mortgage payment will increase and this will then cover your shortage. If you don’t see the increases and your account continues to be short this can lead to a deficiency in your escrow account.
An escrow deficiency is when there is a negative balance in your escrow account. This happens when the investor/bank has had to advance funds in order to cover the disbursements. When this happens you will either have to pay the amount you are negative to bring to current or will have to divide your negative amount into a year and make a monthly payment in addition to your existing new escrow payment. For example; escrow payment $300/mo, negative balance $800, 800 divided by 12 = 66.67, so now your new escrow payment will be $366.67. Note: If the deficiency is less than one month’s escrow payment, you will have 30 days to repay the amount. If the amount exceeds one month’s escrow payment, you have 12 months to repay it.
Again, the key to preventing escrow shortage and/or deficiencies is to keep an eye out for your property tax assessment, as well as your homeowner’s insurance. The sooner you can catch the increase the less likely you will have a shortage and/or deficiency.
If all this escrow talk has you twisted up in knots and have more questions or need further clarification, please feel free to reach out to us.