An escrow shortage is when you don’t have enough money in your escrow account to cover the actual amount needed to pay your bills. Money for the escrow account comes directly from your monthly mortgage payment. How much of the money you pay that goes to your escrow account is determined by your yearly escrow analysis. When you’re looking at your payment amount, it’s helpful to view the payment as two categories: one for principal and interest (the amount that goes toward paying off your home loan) and the other for property tax, homeowners insurance and mortgage insurance. Escrow shortages can occur when trying to estimate the taxes due in the coming year or predict changes in insurance premiums. Your mortgage lender is responsible for estimating these amounts, as they manage your escrow account. Sometimes these amounts are overestimated, resulting in an escrow refund. But when they’re underestimated, you have an escrow shortage. In situations like this, you’ll most likely have to make an escrow shortage payment.What Causes An Escrow Shortage?
For example, if you buy a home that was built for you, your initial tax assessment will more than likely only consider the land value of the home. But once the property is assessed again, it will include the land value plus the value of your home. As a result, your property taxes will increase and so will your escrow payment. This means, ultimately, your monthly mortgage payment will increase.
Escrow Shortage Example
If your annual tax payment is projected to be $2,400, $200 goes to your escrow account every month ($2,400 divided by 12 months in a year). If your projected insurance amount is $1,200, $100 goes to escrow every month.
So, if you have a $1,200 monthly mortgage payment, $900 goes toward your principal and interest, while the remaining $300 goes toward your escrow account every month.
However, at the time of your escrow analysis, let’s say that your taxes have been assessed and they have increased from the amount your mortgage lender thought they would be during last year’s analysis. The actual amount comes in at $3,000 for taxes and $1,600 for homeowners insurance – that’s a difference of $1,000 from the analysis estimate.
TAXES:
- Escrow Analysis Prediction: $2,400
- Actual Tax Amount: $3,000
- Difference: -$600
INSURANCE:
- Escrow Analysis Prediction: $1,200
- Actual Insurance Amount: $1,600
- Difference: -$400
Total Shortage For Tax/Insurance Bill: $1,000
At this point, you’re responsible for the $1,000 required to make up the total amount due for your taxes and insurance. Additionally, you’ll notice an increase in your monthly mortgage payment. The reason for this increase is to cover the newly assessed taxes and homeowners insurance.
