What Is an Escrow Shortfall?
An escrow shortfall can lead to an unexpected and unwelcome increase in your mortgage payment. Banks collect for escrow using the best information available. Sometimes that information is inaccurate. Other situations, such as tax increases, render the old amount invalid. If an escrow shortfall exists, it falls upon you to make up the difference.
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Escrow Accounts
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An escrow account is set up to ensure that your taxes or insurance dues are paid with your monthly mortgage payment. The lender makes its best effort to determine what your premiums will be for the upcoming year. It spreads this amount out over 12 monthly payments. It makes payments to the municipality or insurance company on a monthly, quarterly or yearly basis, depending on the recipient’s collection policy. Each year, your payment can fluctuate based on increases or decreases in your tax bill or insurance premium.
Escrow Analysis
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At the end of the year, the bank performs an escrow analysis on its accounts. This is essentially an audit of every account that has escrow attached. It verifies that the proper amounts are being collected and remitted to the appropriate party. If the bank notices any discrepancies or errors, it will take corrective action and contact the borrower. This process typically occurs toward the end of the year, usually November or early December, to ensure completion prior to the start of a new calendar year.
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Shortage
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An escrow shortage occurs when the lender does not collect enough to satisfy your taxes. It will still make the payment to keep your taxes or insurance current, but it will pass through the obligation to you. You will receive notification that a shortfall exists. Most banks will give you the option to either pay the entire amount of the shortage or to amortize it over the next 12 months, resulting in an increase in your mortgage payment.
What to Do
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In most cases, there is little you can do about an escrow shortage. Taxes and insurance premiums can go up without your consent. You can lessen the financial burden by trying to be prepared. Put aside 5 to 10 percent of your yearly tax payment. If your tax stays the same, you have extra savings. If it goes up, you can pay the shortfall immediately without having to deal with an increased mortgage payment. Also, be aware of your home’s tax-assessed value. If your taxes seem excessively high for the value of your home, contact the municipality and request a recalculation of your property tax.
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