The escrow shortage It is a very common thing among homeowners.
Let’s start with a quick review, an escrow account or escrow account is an account where the funds necessary to pay property taxes and homeowners insurance are kept when you are granted a mortgage.
It is established at the time of your purchase and/or refinancing. It’s included in your prepaid expenses (closing costs) on your loan. You then pay your security deposits each month along with your mortgage payment.
Through an escrow account, your payments are consolidated so that you can make a single monthly disbursement instead of multiple payments that you should make at different times. Every year an analysis of the escrow account is done and your collector will look at the property taxes and your insurance to see if they need to make any changes. If they require an adjustment, you will receive a notification on your mortgage statement showing a decrease or increase in your payment.
If there is an increase in your taxes and/or insurance, then you may find yourself with an escrow shortage. This is where you still have a positive balance in your escrow account but do not have enough funds to cover the new fees.
If you bought a newly built home, you will surely be keeping an eye on your tax assessment. The reason for this is because when you bought there was no house built to assess, only the land. This can often cause a shortage of escrow funds because the taxes used and estimated are usually underestimated in these cases.
How can you correct and avoid being in escrow shortage?
You will need to pay close attention when you receive your tax return from the county. You should be aware of the value of the property and if it has increased from the previous year or from the time you bought it. You will also have to be attentive to any information that your home insurance sends you. Check if your premium has increased. When you see that something has changed, you should call your administrator and ask for an analysis of the escrow.
If you are short of money, you will know that your mortgage payment will increase and this will cover the shortfall. If you don’t see increases and your account is still short, this can lead to a deficiency in your escrow account.
An escrow account deficiency occurs when there is a negative balance in your escrow account.. That is, when the investor/bank has had to advance funds to cover disbursements. If this happens, you will have to pay the negative amount to bring it current or you will have to divide the negative amount over a year and make a monthly payment, in addition to the existing escrow payment. For example; escrow payment $300/month, 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 pay the amount. If the amount exceeds one month’s escrow payment, you have 12 months to return it.
One more time, The key to avoiding escrow shortages and/or shortages is to be vigilant about your property tax assessment, as well as your homeowner’s insurance. The sooner you can cover the increase, the less likely it is that you will have a shortage and/or deficiency.