Sometimes your escrow will have a shortage.
An escrow shortage occurs when at some point your mortgage escrow account will not contain the required cushion after distributions are made throughout the year Section 10 of the Real Estate Settlement Procedures Act gives lenders authorization to require up to a two-month cushion of escrow payments in a consumer's escrow account at all times. Lenders analyze an escrow account at least once per year. If a lender determines that you will fall short of your escrow cushion, it will send you a separate bill for the full amount and inform you of the option to spread the payments throughout the year.
Instructions
1. Determine if the escrow shortage amount you have been informed about is correct. Write down all the distributions to be made out of your escrow account for taxes, insurance and Private Mortgage Insurance. Add all the distributions together and divide your answer by 12. This is your monthly escrow payment. Make a schedule for 12 months detailing your contributions into your escrow account each month, and the distributions that are made out of your escrow account for taxes and insurance throughout the year. Determine the balance each month according to this schedule.
2. Find out for which month your escrow account balance reaches the lowest point. Does your escrow account contain the lender required cushion amount during this month? If not, determine the difference between two times your escrow payment and your escrow balance are at the lowest point. Does this amount match the escrow shortage amount you have been given? If not, contact your lender and ask for a recent analysis of your escrow account.
3. Search for lower cost homeowners insurance. You cannot control how much you pay in taxes throughout the year, but you possibly can control your homeowners insurance costs. Comparison shop with several insurance companies and ask for quotes according to the value of your home. Any savings your current or new insurance company can provide will contribute to a reduction of your escrow shortage. Just remember to be sure you are meeting your lender required deductible when asking for quotes. If you are able to find cheaper homeowners insurance, have your new insurance company send your lender proof of your new insurance. Once your lender has confirmed your new insurance costs, ask the lender for a new analysis on your escrow account.
4. Pay your lender the shortage amount. Most lenders give you the option of paying your mortgage escrow shortage as a lump sum or as divided monthly payments, which are added onto your mortgage payment. If you have been given a monthly payment amount you cannot afford, contact your lender and ask if it can divide your payment over a longer period of time. In some cases, lenders have been known to divide escrow shortage payments over 24 months. If you request and receive a longer period of time to pay off your escrow shortage, understand that any increase in taxes and/or insurance during that time could mean an additional escrow shortage after the first 12 months.
5. Request to remove your escrow account from your mortgage. In some states, you have the option of requesting your escrow account be dropped from your mortgage account. If you take this option, be careful to remember to make the required insurance and tax payments in a timely manner on your own. Any delinquency in making payments in this situation gives the lender the right to force an escrow account on your mortgage for the remainder of the loan.
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