What if My Mortgage Lender Didn't Put Enough Into Escrow?

Mortgage lenders use an escrow account to pay for taxes and insurance.
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When you buy a home, your lender will usually require you to pay your homeowner's insurance and real estate taxes monthly along with your mortgage payment. This money will be held in an escrow account and the lender will use it to pay the taxes and insurance when they are due. Because property taxes and insurance premiums sometimes increase, your escrow account may occasionally come up short. Lenders have ways to deal with this.

Establishing Escrow

When you close on your home purchase, your lender will establish an escrow account and require you put in a certain amount of money for taxes and insurance, depending on what is customary in your area. Though you likely will have a home insurance policy by this point and know exactly what your monthly payment will be, the amount the lender establishes for taxes will be an estimate based on the current assessment of the property. In some cases your lender may actually estimate your taxes a bit higher to ensure there is a cushion if they increase.

Reasons for Coming Up Short

After your escrow account is established, your lender won't adjust it again until after your tax and insurance bills have come due. Either your insurance or your taxes -- or both -- could increase during that time. For example, if you paid considerably more than the assessed value of your home, your local property taxing authority may do a revaluation of your home, which could result in a higher tax bill. If a windstorm damages your roof and you file a claim with your insurer, it could decide to raise your rates.

What Happens When You Have a Shortfall

If your escrow account is short of funds when it comes time to pay your insurance and taxes, your lender will pay these amounts to ensure they are paid on time and then likely will give you a couple of options. The lender will offer you the chance to make a lump-sum payment to cure the shortfall in your escrow account if you choose and in some cases may require it if the amount is small. If the amount you owe is larger, the lender will simply adjust your payment amount to make up the shortfall over the next year. For example, if your escrow account was short by $300, your monthly payment would increase by $25.

What You Can Do

If you realize that your insurance or taxes have increased during the year, you can proactively start paying extra into escrow or you can contact your lender and ask the company to adjust your payment amount. If you choose simply to make extra payments, write on your check or include a note with each payment notifying the lender that the extra amount should go toward taxes and insurance. Keep in mind, though, that you don't need to do this. There is no penalty if your escrow account comes up short.

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