What Is an Escrow Shortage?

When the total of your mortgage escrow account falls below the amount you need to pay property taxes and insurance premiums, you have an escrow shortage.

Daria Kelly Uhlig
Daria Kelly Uhlig
  • Licensed Realtor with 10+ years in personal finance content

  • Contributor to Nasdaq and USA Today

Daria is a licensed Realtor and resort property manager specializing in personal finance, real estate, and insurance topics. In her spare time, she practices photography.

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Chris Schafer
Edited byChris Schafer
Chris Schafer
Chris SchaferSenior Editor
  • 15+ years in content creation

  • 7+ years in business and financial services content

Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.

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Updated January 3, 2024 at 4:00 PM PST | Reading time: 4 minutes

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Many homeowners have “PITI” mortgage payments — short for “principal, interest, taxes, and insurance” — that use an escrow account to hold the tax and insurance portions of their monthly payments.[1] An escrow account holds the money you add to your mortgage loan payment for property taxes, homeowners insurance premiums, and flood insurance premiums, if applicable.

This arrangement is beneficial to homeowners because it lets you pay the bills as part of your monthly mortgage payments. And because your lender submits the payments, you don’t have to worry about paying the bills yourself.

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The purpose of an escrow account

The primary purpose of an escrow account is to protect the lender’s investment in your home by giving it control over your homeowners insurance and property tax payments to ensure timely payment.

This is important because failure to pay the tax can result in you losing the home in a tax sale. Failure to pay homeowners insurance can result in a lapse in coverage that would leave you unable to repair or rebuild if the home was damaged or destroyed during the lapse.

Escrow accounts also benefit homeowners because the lender does all the work. The account forecasts the total you’ll owe on the taxes and insurance for the coming year and adds a cushion in case the bills increase.[2] Then, it divides that amount by 12 and adds 1/12 of the total to your monthly mortgage payments.

As you make your payments each month, the lender puts the tax and insurance amount into the escrow account and then issues payments when it receives the bills from your taxing jurisdiction and insurance company.

What does it mean to have an escrow shortage?

An escrow shortage means that, according to the lender’s calculations, your current escrow payments won’t provide enough money to cover the tax and insurance payments and the required reserve.[3] You’ll find out if you have a shortage after the lender does your annual escrow analysis.

The law requires your lender to analyze your account at least once a year. Your lender does that by projecting a target escrow balance for the coming year based on what you paid last year. It then calculates your payments for the coming year and determines if the payments will exceed or fall short of the target.

A surplus is when the payments exceed the target. A shortage is when the payments will fall short. There’s no penalty for having a shortage, but you’ll have to make up the amount the escrow account is or be short.

Why do I have an escrow shortage?

Lenders base escrow targets on projections that might or might not turn out to be correct. A number of circumstances can lead to a shortage.

For example:

  • Your property tax increased. A reassessment or change in tax rates might have increased your property tax.

  • Your insurance premium increased. Your homeowners insurance company might have increased its rates, causing your premium to go up.

  • You have insufficient reserves. Your tax or insurance might’ve been slightly higher than expected last year, causing the lender to dip into the reserves.

Escrow shortage example

Say your property tax bill is $3,600, and your homeowners insurance premium is $1,200. Together, they total $4,800, which is $400 per month. Add an additional three month’s worth for reserves, and your escrow target for the coming year is $6,000, or $500 per month. Your lender will then add $500 to your monthly principal and interest payment.

Now, imagine that your county tax assessor reassesses your home for the first time in several years, and the county is also increasing the tax rate. Between the two events, your tax bill increases from $3,600 to $4,000. The $400 increase results in a $400 shortage in your escrow account.

The mortgage servicer will then notify you of the shortage within 30 days after it completes your escrow analysis and let you know what your options are for correcting it.

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How to remedy an escrow shortage

If your escrow analysis reveals a shortage, your mortgage lender will show the amount on your analysis statement along with information about your options for resolving it.

Those options include:

  • Making a lump-sum payment for the full amount of the shortage.

  • Paying 1/12 of the shortfall with each mortgage payment while staying current with the current escrow payments.

  • Paying part of the shortage as a lump sum and the rest in 12 monthly payments added to your mortgage payments.

Your lender might also have to increase your regular PITI mortgage payment to avoid a shortfall the following year.

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Escrow shortage FAQs

If you still have questions surrounding escrow shortage, the following answers can help.

  • What happens if you have an escrow shortage?

    When you have an escrow shortage, you’ll have to pay extra into the escrow account to make sure the lender can pay your taxes and insurance. You can do that by making a one-time payment to cover the shortfall, covering the shortfall in 12 monthly payments, or by a combination of lump-sum and monthly payments.

  • Is it normal to have an escrow shortage every year?

    It’s not unusual in locations depending on where you live. Florida, for example, has seen increasing homeowners insurance premiums because of catastrophic weather events. These rising rates make such shortages more common in Florida.

  • What steps can you take to lower your mortgage after an escrow shortage increases your monthly payments?

    You can keep your mortgage payment from going up by making a payment for the full amount of the escrow shortage.

    Another alternative is to ask your lender for an escrow waiver, which would eliminate the escrow account and require you to pay your own taxes and insurance. However, that won’t save money except, perhaps, for the reserve amount, and it could increase your risk of missing payments. If that happens, the lender can terminate the waiver and increase your mortgage payment to cover the reinstated escrow.

  • Does an escrow analysis really only happen once a year?

    Typically, yes. Federal law requires just one analysis per year.

Sources

  1. Consumer Financial Protection Bureau. "What is an escrow or impound account?." Accessed November 29, 2023
  2. Chase. "Escrow Overview." Accessed November 29, 2023
  3. Consumer Finance.gov. "Escrow Accounts." Accessed November 29, 2023
Daria Kelly Uhlig
Daria Kelly Uhlig

Daria Uhlig is a freelance writer and editor with over a decade of experience creating personal finance content. Her work appears on USA Today, Nasdaq, MSN, Yahoo Finance, Fox Business, GOBankingRates and AOL. As a licensed Realtor and resort property manager, she specializes in real estate topics, including landlord, homeowners and renters insurance. In her spare time, Daria can be found photographing people and places on Maryland's Eastern Shore. Connect with her on LinkedIn.

Chris Schafer
Edited byChris SchaferSenior Editor
Chris Schafer
Chris SchaferSenior Editor
  • 15+ years in content creation

  • 7+ years in business and financial services content

Chris is a seasoned writer/editor with past experience across myriad industries, including insurance, SAS, finance, Medicare, logistics, marketing/advertising, and many more.

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