Your Mortgage: Why is my escrow account short?

Mike Miles

If you own a home and pay a mortgage, you probably have your escrows included in your payment. Typically, its either property taxes, homeowner’s insurance or both included in your payment. Part of the mortgage payment repays the loan, a portion of it contributes to the insurance escrow, and another contributes to the property tax escrow account. So, if mortgage payments are made on time monthly, how could an escrow account ever be short? And what occurs when that happens?

Taxes and insurance have annual bills which are paid out by mortgage loan servicers in accordance with due dates, and your insurance due date is dependent upon when your policy renews. Your tax due date is every six months in Kansas (May and December) and every 12 months in Missouri (December). Here’s an example of what an escrow summary might look like for a mortgage on a Prairie Village home:

In this example, you can see at the end of the year there is a shortage of $162. This schedule keeps going, and if the homeowner changes something (sells the house, changes insurance policies, etc), the renewal date could change. If nothing changes in this example, there would be an additional deficiency of $514 every year. Additionally, insurance premiums and property taxes typically increase every year, so the payouts as we see them in May, August, and December will increase, causing an accelerated deficiency.

The reason an escrow account would ever be short is usually for one of two reasons. The first possibility was that it wasn’t set up correctly when you closed on your most recent loan. When this happens, too little is initially accounted for. Every time you close a loan, your escrow account is supposed to have the proper number of month’s reserves to supply your tax and insurance payment dates, in addition to a two-month cushion. That cushion allows the excess to compensate for when tax and insurance premiums increase. The second possibility is that the homeowner could have experienced a large increase in insurance premiums, tax amount, or both since the time of closing a home loan. If the increase proves too much too quickly, the two-month cushion may not be enough to compensate sufficiently.

When escrow accounts experience a shortage, the lender provides a couple of options to get the account caught up and raise the escrow portion of your payment. This helps keep pace with the scheduled insurance and tax payouts. These two options include:

  1. Pay a lump sum once to eliminate the account shortage.
  2. Pro-rate the shortage over a period of time (usually up to 12 months) to eliminate the shortage.

If you experience an escrow shortage, the first thing you should do is look at your disbursement summary. This should be found online with your account, though you may have to call the lender and request it. Seeing the summary should help understand what caused the shortage, and you may have an opportunity to revisit your insurance policy as well. You’d be surprised at how many times your premium may rise yearly during the policy lifespan, so getting a quote might make an impact.

Feel free to ask questions or learn more information by calling Mike or his team at Fountain Mortgage. He can be reached at 913.745.7000 or by email at mmiles@fountainmortgage.com.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268