If you have a mortgage on your house, your lender likely takes extra money, as agreed at closing, in order to pay your property taxes and homeowners insurance. This amount is put in an escrow account and paid as required throughout the year. At the end of the year, your lender will assess how much money is left in the account. If you owed more than what was in the account, you’ll be sent a bill that you can either pay or divide into monthly installments over the next year, depending on the amount of the discrepancy.
About Negative Escrow Balances
Lenders have a vested interest in whether you pay your homeowners insurance premiums and property taxes on time. Allow either to lapse and your property could be in jeopardy, which is a problem for the financial institution that let you borrow hundreds of thousands of dollars to buy it. For that reason, lenders typically have borrowers agree to pay a fixed monthly amount, which is wrapped into their monthly mortgage payment. That monthly amount is set aside in an escrow account and used to pay those bills as they come in.
Ideally, the amount taken out will cover a homeowner’s property tax and insurance, but it’s rare that it’s right on the nose. If the amount you pay is more than what you owe, you’ll get an escrow refund at the end of the year. However, if you have a negative escrow amount, your mortgage company may send you a bill for the shortage.
Paying Escrow Shortages
When you have a negative escrow balance, you’ll probably first hear about it when you receive a bill. Your payment options depend on how much that discrepancy actually is, but at the very least, you’ll be required to pay the amount due in full. The bill should tell you how to pay, but typically it means writing a check or making an online payment through the lender’s website.
If your amount due is greater than a certain threshold, your lender will let you divide the negative escrow amount over 12 payments, possibly even adding it to the monthly amount you’ll pay next year. This is in addition to the escrow you’re already paying as part of your mortgage payment. Your lender will also up the amount you’re paying each month to make sure enough is being set aside to pay your new, apparently increased, property taxes and/or homeowners insurance premiums.
Calculating Escrow Payments
How much you pay into escrow each month is calculated in advance, using the projected amount you’ll owe for homeowners insurance and property taxes. This amount is divided by 12 and added to your monthly mortgage payment. Lenders must work within federal and local laws when calculating and administering escrow payments, including the U.S. Department of Housing and Urban Development Escrow Regulations under the agency’s Real Estate Settlement and Procedures Act.
HUD escrow regulations mandate strict disclosure requirements, including a statement at closing and an annual escrow statement. The initial amount you’ll be required to put into the escrow account must be based on the estimated taxes and insurance premiums over the 12 months to follow. If any other charges are included in that estimation, they must be separately disclosed.
Regulations Regarding Overages and Shortages
After closing, HUD escrow regulations continue to govern escrow analysis processes. Your lender can maintain a cushion of up to one-sixth of the total escrow charges anticipated over the next 12 months, as long as local governing authorities don’t set a lower maximum rate. HUD requires negative escrow amounts and overages to be handled as follows:
- Overages greater than $50 must be refunded within 30 days. If there are past-due amounts over 30 days, the overage may be applied to offset those.
- Overages of $50 or less may be refunded or credited toward next year’s escrow payments.
- Negative escrow balances lower than one month’s escrow payment can be either required to be repaid in 30 days or be divided into 12 monthly payments. Lenders may also allow the shortage to remain on the account, potentially to be made up with next year’s overages.
- Shortages greater than one month’s escrow payment may be divided into 12 monthly payments or allowed to remain.
- CNN Money: How Does an Escrow Account Work?
- Wells Fargo: Escrow Shortage
- Quicken Loans: What in the World Is an Escrow Shortage?
- Consumer Compliance: Real Estate Settlement Procedures Act
- Cornell Law School. "Escrow." Accessed March 15, 2020.
- Los Angeles County Consumer and Business Affairs. "Escrow." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "What Is an Escrow or Impound Account?" Accessed March 15, 2020.
- The People's Law Library of Maryland. "Rent Escrow: When the Landlord Fails to Make Repairs." Accessed March 15, 2020.
- California Department of Business Oversight. "Online Escrow Fraud Questions and Answers." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Mortgages Key Terms." Accessed March 15, 2020.
- FindLaw. "Connecticut Security Deposit Laws." Accessed March 15, 2020.
- When refinancing a mortgage, ask the lender about rolling the negative escrow balance into your new loan. If you have enough equity in your home at the time of the refinance, you can use it to fix the negative escrow account.
- If you do not elect to pay the negative escrow balance in full, the lender can divide the amount due and add it to your monthly payments. This will increase your monthly house payment.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.