Each year the lender will project how much will be required in the escrow account for the upcoming year. The lender will base this on the amount of taxes and/or insurance that were paid during the past 12 months. The total paid is divided by 12 to get your projected monthly escrow payment.

Sometimes, the payment must be adjusted to ensure that the monthly balance remains above a required minimum balance during the next 12 months. This minimum balance is typically equal to two months of escrow payments.

If the taxes and/or insurance amounts change during the next year or the monthly escrow balance falls below the required minimum amount, there could either be a shortage or surplus in the account when the lender computes an Annual Escrow Analysis for next year.

The lender estimated the tax payments and/or insurance premiums prior to the loan being originated, using the most recent tax and/or insurance amounts paid on the property.

If the home is newly constructed, the lender may base their estimate on the taxes that were paid for the property prior to making any improvements.

The lender needs to project the tax and/or insurance premiums based on the amounts paid in the previous year, unless the lender receives official notice of an amount change for the upcoming year from a taxing authority or insurance provider.

Each year, the lender reviews the escrow account to make sure there are enough funds in it to cover the taxes and/or insurance premiums. The lender will send the borrower (homeowner) a summary statement of this report, called an Escrow Analysis. This includes a review of activity in the escrow account during the past 12 months, with projections for the next 12 months.

This helps the lender determine the amount the borrower needs to pay into the escrow account each month, so that the lender can pay the taxes and/or insurance expenses on the borrower’s behalf for the next 12 months.

What is an escrow shortage or surplus?

A shortage occurs when the escrow account balance at its projected lowest point for the next 12 months is below the required minimum balance. This required balance is typically equal to two months of escrow payments. It helps to protect the borrower, so that there will be enough funds in the account to cover an unexpected tax and/or insurance increase.

If the taxes and/or insurance costs were lower than expected, the account may have a surplus.

If the surplus is $50 or more, a surplus check (refund) will be attached to the Annual Escrow Analysis for the borrower to cash it. 

For surpluses less than $50, the funds will be left in the escrow account.

How could there be a shortage?

There are a few reasons why there may not be enough funds in the escrow account to meet the minimum balance:

• Property taxes and/or insurance premiums increased.
• Property taxes were reassessed.
• Insurance provider(s) changed.
• Insurance premium increased.
• The due date of the property taxes and/or insurance premiums changed.
• The borrower made fewer escrow payments into the account than expected.
• The starting escrow balance for the 12-month period was lower than expected due to higher payouts in the prior year.

If you have questions about an increase in your property taxes or insurance premiums, please contact your local taxing authority or insurance agent.

What are the options for paying my escrow shortage?

There are Three options for paying a shortage:

Option 1: Pay nothing and spread the shortage amount evenly across next year’s payments.

Option 2: Pay the full shortage now.

Please note: If the tax and/or insurance expenses have increased, the monthly mortgage payment may still go up, even if the full shortage has been paid.

The monthly payment should usually update within five days of paying the shortage.

Option 3: Pay part of the shortage.

The remaining shortage balance will be spread out over 12 months and added to the monthly mortgage payment. During the month after the Annual Escrow Analysis is complete, (if you have set up an online account) – you can view the Escrow Summary page for details and to see what effect a partial payment will have on the next year’s mortgage payment.

If the escrow shortage is paid, will the monthly payment remain the same?

The payment may still go up, even if the entire shortage is paid, if the taxes or insurance increase. 

When can a shortage payment be made?

As soon as the account analysis has been completed, the shortage can be paid in part or in full. 

After the shortage payment is made, the lender will mail out a statement within 7 - 10 days showing the shortage payment and the new monthly payment amount.

Any escrow-related changes to the mortgage payment will go into effect on the due date one month after the analysis is completed.

For example: if the analysis is completed in January, a payment change would take effect in March. 

Please note: Even if the full shortage amount is paid – your monthly payment may still change if the taxes and/or insurance increase.

How to prevent a shortage from happening in the future?

Borrowers may not be able to prevent a shortage. However, borrowers can minimize the impact by staying informed about their escrow account by reviewing all mailed notices from the lender or by going online on the lender’s website (if an online account was set up) to check the account and see what payment was made from the escrow account and compare it to what the projected in the Annual Escrow Analysis.

If it is higher than projected, an additional escrow payment can be made online to help lower or prevent a shortage.

The escrow payment went down, so the monthly payment is lower.

When I can I start paying the lower amount?

You will need to continue making the higher payment until the effective date on the escrow analysis (shown at the top of the analysis statement).