What Is an Escrow Shortage?

When you buy a home, your lender typically sets up an escrow account to hold funds for your property taxes and homeowners insurance. Each month, a portion of your mortgage payment is directed into this account to ensure there are sufficient funds to cover these costs when they become due. An escrow shortage occurs when there isn’t enough money in your escrow account to pay your estimated taxes and insurance in the future.

What Causes an Escrow Shortage?

Escrow shortages can occur due to several reasons, including increases in property taxes or homeowners insurance premiums. For example, if your property taxes rise from $2,000 to $3,000 per year, and your insurance costs increase from $1,200 to $1,500 annually, this $1,300 overall cost increase can lead to an escrow shortage.

How to Fix an Escrow Shortage

Once your mortgage servicer completes an escrow analysis and identifies a shortage, you have several options to address it:

1. Pay the Full Shortage Now

Paying the entire shortage amount in one lump sum can balance your escrow account immediately. However, your monthly mortgage payment may still increase if your property tax or insurance costs have risen.

2. Pay the Shortage Over the Next 12 Months

Spread the shortage amount over your monthly payments for the next year. This option is beneficial if you cannot pay the full amount upfront.

3. Pay Part of the Shortage Now, and the Rest Over the Next 12 Months

This option allows you to make a partial payment upfront and spread the remaining balance over the next year, combining the advantages of the previous two choices.

How to Avoid an Escrow Shortage

While it may be challenging to avoid an escrow shortage entirely, staying informed about changes to your property taxes and insurance rates can help you prepare for extra costs. Consider adding extra funds to your escrow account ahead of time if you anticipate higher bills. Additionally, making higher monthly escrow payments can help you stay ahead of rising expenses.

The Bottom Line

Having a mortgage often means having an escrow account to cover property taxes and insurance. If these costs increase, you might face an escrow shortage. You can address this by paying the shortage in one lump sum, spreading it out over a year, or a combination of both. Staying on top of your mortgage and escrow payments is crucial for your financial health.

For expert mortgage services and advice, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your mortgage needs and ensure your financial stability.