What Happens If an Escrow Account Becomes Negative?

An escrow account is a fund that your mortgage lender maintains and that you pay into as part of your monthly mortgage payment. Not all mortgages come with an escrow account, but if you have one then your lender will use the account to pay your homeowners insurance and property taxes when they’re due.

Without an escrow account, you’ll have to remember to make those payments on your own. An escrow account can be really convenient, but if your insurance costs or taxes unexpectedly rise, you will be expected to pay your mortgage lender the difference.

TL;DR (Too Long; Didn't Read)

If your escrow account becomes negative, your mortgage company will request a payment from you to make up the difference.

Annual Escrow Analysis

How does your mortgage lender know how much to withhold for your escrow account? Once a year, your lender will look at your loan and analyze how much you will have to pay for taxes and insurance in the upcoming year. These fees are totaled and then divided into monthly payments.

You should receive at least one escrow analysis per year breaking down the monthly escrow charges for the next 12 months. You should also receive at least one escrow statement per year showing your escrow deposits and your lender’s withdrawals for payments for the previous year.

Negative Escrow Balance

A change in the cost of your insurance can cause your escrow analysis to become outdated, as can a hike in your property tax assessment. When your mortgage servicer makes a payment from your escrow account and there aren’t enough funds, you will be notified that you have a negative balance.

Your servicer will advance the funds on your behalf, but you will be required to pay the money back. You may be given two options for repayment when you have a negative balance: making up for the shortage with a one-time payment, or having your shortage automatically spread over several months. Some lenders only provide the second option.

Being Proactive About Your Escrow Account

A negative escrow balance can throw off your household budget, especially if you have to make a lump-sum payment to your mortgage lender to make up for the shortfall. You can avoid surprises and plan ahead by paying attention to communications from your tax assessor and insurance company about possible cost increases.

You can’t do anything about tax increases except pay them, but you do have the option of shopping around for a different insurance provider when you see your rate increase. Having an emergency savings account to back up your escrow account is another way to cut down on unwelcome surprises related to a negative escrow balance.

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