Escrow accounts can benefit homeowners and mortgage lenders, however, when account shortages arise, you'll have to take matters into your own hands. Homeowners open escrow accounts to facilitate property insurance and tax payments. Your mortgage lender may also require an escrow account to ensure you stay current on homeowners insurance and real estate taxes.
Calculate the mandatory amounts needed for your account and review your insurance and tax bills to ensure your lender hasn't miscalculated your escrow. Your mortgage lender must send you an annual statement of escrow activity, which you should also reference to figure out what went wrong.
How Shortages Happen
Miscalculated taxes, increased property taxes, a hike in your homeowners insurance premium and simply failing to make your obligatory monthly escrow payment can result in an account shortage. Your monthly mortgage statement may show the exact escrow amount due and shows your current escrow balance. Your escrow payment is equal to one-twelfth of your upcoming homeowners insurance and annual tax bill.
Remitting a payment that's short of the full mortgage and escrow amount due, is likely to result in a shortage. The easiest way to deal with an escrow shortage due to nonpayment or underpayment is to tally up the unpaid amount and direct your lender to escrow it immediately. Lenders may also charge an additional two months of escrow payments to establish an account "cushion."
Analyze Your Annual Escrow Statement
A mandatory annual escrow statement reveals any escrow shortages. Lenders can automatically increase your monthly payment to offset a shortage before your escrow statement is generated. The lender deposits a higher proportion of your increased monthly payment into escrow until you're no longer in the red.
As soon as you find out that you have a shortage, review your most recent annual escrow statement. It shows the total you paid into the account for a specific period, the portion of your monthly mortgage payment set aside for escrow, the total the lender last paid out to your tax authority and insurance provider, and the account balance at the end of the statement period.
Confirm Your Lender Paid Correctly
Confirm with your tax authority the most recent annual tax amount due and the date they received it. Lenders are supposed to send payments on time and for the correct amount. If the remittance date or amount is off, tell the lender. They can't charge you for penalties due to their mistakes. Also confirm that your homeowners insurance provider received the correct payment amount on time, as the same escrow rules and responsibilities apply to insurance payments.
Watch for Rate Hikes
If your lender paid the correct amounts and remitted payments on time, your escrow shortage is likely due to rate increases. Tax authorities reassess property values, change tax rates and assess new taxes from time to time, which affects your projected annual tax bill. Likewise, a change in your insurance company or coverage, or industry-wide rate increases, make your next insurance bill higher.
Calculate one-twelfth of the projected bills to ensure your lender collects no more than the maximum amount allowed each month. You can also choose to pay the shortage outright, rather than pay more monthly.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.