When you receive a Notice of Escrow Shortage, it means your escrow account—an account your lender manages to pay property taxes and homeowners insurance on your behalf—doesn’t have enough funds to cover these bills. Mortgage lenders collect escrow money monthly as part of your mortgage payment to make these large annual or semi-annual payments manageable.
This shortage often arises after the lender performs an annual escrow analysis. During this review, the lender estimates your upcoming property taxes and insurance premiums. If those costs have increased due to local tax reassessments, newly approved tax measures, higher insurance premiums often linked to inflation or claims history, or if initial estimates were too low (common with new constructions), they will identify a shortage.
Your Notice of Escrow Shortage will include the shortage amount and describe your repayment options. Under the Real Estate Settlement Procedures Act (RESPA), lenders must give you choices such as:
- Spreading the shortage cost over 12 months (or up to 36 months in some cases), increasing your monthly mortgage payment temporarily.
- Paying the entire shortage as a lump sum upfront.
Even if you pay the lump sum, your monthly payments will often rise afterward to cover the increased ongoing tax and insurance costs.
Understanding these terms is also important:
- A shortage means a projected shortfall in your escrow account over the next year.
- A deficiency means your escrow account balance is already negative because the lender advanced payment on your behalf.
Ignoring a shortage notice is unwise. If you don’t address it, lenders typically adjust your payment automatically and might resort to force-placed insurance—an expensive alternative where the lender purchases insurance on your behalf.
To reduce your risk of shortage, you can regularly shop for lower insurance premiums, monitor local property tax assessments, and consider making voluntary escrow deposits if you anticipate increases. If you believe your property tax assessment or insurance premium is incorrect, you can appeal or shop for better rates and provide evidence to your lender.
For more details on escrow accounts and managing mortgage payments, see our article on Escrow Account Management and learn about Property Taxes. You may also find our guide on Homeowners Insurance helpful for understanding insurance premiums.
Sources:
- Consumer Financial Protection Bureau: What is an escrow or impound account?
- NerdWallet: What Is an Escrow Shortage?
- Investopedia: Escrow Account For a Mortgage: How It Works
By understanding your Notice of Escrow Shortage and responding promptly, you can avoid costly surprises and maintain smooth mortgage servicing.
