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Understanding Escrow Shortages and How to Manage Them
When you purchase a home, your lender typically establishes an escrow account to manage the funds needed for your property taxes and homeowners insurance. Each month, a portion of your mortgage payment is allocated to this account to ensure there are sufficient funds to cover these expenses when they are due.
What Is an Escrow Shortage?
An escrow shortage occurs when the funds in your escrow account are insufficient to cover your estimated future taxes and insurance. Even if there is money in the account, it is considered a shortage if it does not meet the required amount for these bills.
In contrast, an escrow deficiency means your account has a negative balance, often because your lender had to cover the shortfall for your tax and insurance payments. Conversely, an escrow surplus occurs when your account has more funds than needed, often resulting in a refund if the surplus exceeds a certain amount.
Causes of Escrow Shortages
Escrow shortages can arise from increases in property taxes or homeowners insurance. For instance, if your annual property taxes increase from $2,000 to $3,000 and your insurance rises from $1,200 to $1,500, this $1,300 increase can lead to a shortage in your escrow account.
How to Fix an Escrow Shortage
Upon completing an escrow analysis, your mortgage servicer will provide a report detailing any shortages. You typically have three options to address an escrow shortage:
1. Pay the Full Shortage Now
Paying the entire shortage in a lump sum can balance your escrow account. However, your monthly mortgage payment may still increase if your property tax or insurance costs have risen.
2. Pay the Shortage Over 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 12 Months
This hybrid approach allows you to make a partial payment upfront and spread the remaining balance over the next year, making it a more manageable option.
How to Avoid an Escrow Shortage
While it may be challenging to avoid an escrow shortage entirely, staying informed about changes in your property taxes and insurance rates can help you prepare for increased costs. Adding extra funds to your escrow account in anticipation of higher bills or making higher monthly escrow payments can also be beneficial.
The Bottom Line
Having an escrow account is crucial for managing your property taxes and insurance payments. If these costs increase, you may face an escrow shortage. Addressing this shortage can be done through a lump sum payment, spreading the payments over a year, or a combination of both.
At O1ne Mortgage, we are here to assist you with all your mortgage needs. If you have any questions or need help managing your escrow account, please call us at 213-732-3074. Our team of experts is ready to provide you with the best service possible.
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