An escrow shortage can raise a homeowner’s monthly mortgage bill in two ways at once: more money may be needed for the next year’s taxes and insurance, while an additional payment makes up an earlier shortfall.
Paying off the shortage does not necessarily bring the monthly bill back to its old level. It can remove the catch-up amount while leaving the higher ongoing cost of property taxes or homeowners insurance.
The Consumer Financial Protection Bureau explains that an escrow account, sometimes called an impound account, holds money a mortgage servicer collects to pay property-related expenses on the borrower’s behalf. Those expenses can change even when the mortgage interest rate does not.
The annual escrow statement is the place to separate the changes. Compare what the servicer expected to pay with the taxes and insurance it actually paid. Then look at its projection for the coming year, the new monthly escrow amount and any separate shortage repayment.
The terminology matters. Under the current federal escrow regulation, a shortage means the balance is below the target amount. A deficiency means the account has a negative balance. They are not interchangeable, and the repayment rules differ.
For an escrow account covered by the Real Estate Settlement Procedures Act, a shortage at least as large as one month’s escrow payment can be left in place or collected in equal monthly payments over at least 12 months. For a smaller shortage, the servicer also has the option of requiring repayment within 30 days. The one-month comparison is with the escrow portion, not the entire mortgage payment.
The rules also permit a limited cushion. The CFPB says a servicer can generally collect monthly amounts based on one-twelfth of reasonably anticipated annual escrow expenses, plus funds to maintain a cushion no larger than two months of those expenses. Loan documents or state law can impose a lower limit. The rule does not require every servicer to keep the maximum cushion.
A surplus works differently. For a borrower who is current under the regulation, a surplus of at least $50 must generally be refunded within 30 days of the analysis. A smaller surplus can be refunded or credited against the next year’s escrow payments.
If a number looks wrong, contact the servicer rather than assuming a higher bill is correct. The CFPB advises comparing mortgage statements with tax and insurance bills. A notice that property taxes were not paid, or an unexplained charge for servicer-purchased insurance, deserves prompt attention.
If a phone call does not fix a suspected mistake, the CFPB’s payment-change guidance says to send a notice of error to the servicer’s designated address for errors and information requests. That address can differ from the place where monthly payments are sent.
JBizNews Desk | Washington, D.C.
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