An escrow shortage occurs when your property taxes or homeowner's insurance premiums increase more than expected. The lender must collect enough in escrow to cover these costs. They spread the shortage over the next 12 months, increasing your monthly payment. You can also pay the shortage as a lump sum to keep your payment the same.
What Causes an Escrow Shortage
The most common causes are: property taxes increasing (reappraisal, tax rate changes), homeowner's insurance premiums rising, or the initial escrow estimate being too low. The lender conducts an escrow analysis annually to compare what was collected against what was actually paid. A shortage means the actual costs exceeded what was collected.
Your Options for Handling the Shortage
Option 1: Pay the shortage as a lump sum and keep your payment the same. Option 2: Spread the shortage over 12 months with a higher monthly payment. Option 3: If there is a surplus over $50, the lender refunds it. Most lenders automatically default to spreading the shortage over 12 months unless you request a lump sum payment.
How to Prevent Future Shortages
Keep track of your property tax payment history and insurance premium changes. When you know a tax increase is coming, save the difference monthly. Protest your property taxes if they increase too much. Shop for lower insurance rates annually. Consider an escrow waiver if you qualify to pay taxes and insurance yourself.