Buying a home is an exciting milestone, but it also comes with financial responsibilities that extend beyond the down payment and monthly mortgage payments. One such responsibility is managing your escrow account. While escrow accounts are designed to cover expenses like property taxes and homeowners insurance, homeowners may encounter a common issue known as an escrow shortage. In this blog, we’ll delve into what an escrow shortage is, why it occurs, and provide valuable tips to avoid it.

What is an Escrow Shortage?

An escrow shortage occurs when there are insufficient funds in your escrow account to cover upcoming expenses such as property taxes or insurance premiums. This can lead to a shortfall that the homeowner must make up either through a lump sum payment or increased monthly escrow payments.

Understanding Property Tax Increases:

One of the key factors contributing to an escrow shortage is property tax increases, especially in the first year after purchasing a home. This is often surprising for new homeowners, particularly if the seller owned the property for many years prior to the purchase. In such cases, property taxes may have been capped or limited in their annual increase. However, when the property changes ownership, this cap is reset, leading to potentially significant tax increases.

Why Do Property Taxes Increase?

Property taxes can increase for various reasons, including rising property values, changes in local tax rates, and improvements to the community’s infrastructure and services. While these increases are often gradual, they can catch homeowners off guard if they’re not adequately prepared.

Tips to Avoid Escrow Shortages:

  1. Conduct Thorough Research: Before purchasing a home, research the property taxes in the area and any potential changes that may occur after the sale. Understanding the tax assessment process and local tax rates can help you anticipate future increases.

  1. Review Your Escrow Analysis: Each year, your lender will conduct an escrow analysis to ensure that your account has enough funds to cover upcoming expenses. Review this analysis carefully to identify any potential shortages or overages.

  1. Plan for Increases: Be proactive in budgeting for potential property tax increases. Set aside funds in a separate savings account to cover any shortfalls in your escrow account, especially during the first year of homeownership.

  1. Communicate with Your Lender: If you anticipate an increase in property taxes or insurance premiums, communicate with your lender as soon as possible. They may be able to adjust your escrow payments or provide guidance on managing the shortfall.

  1. Consider Escrow Cushions: Some lenders may require or offer an escrow cushion, which is an additional amount held in your escrow account to cover unexpected expenses or fluctuations in taxes and insurance.

Conclusion:

An escrow shortage can catch homeowners off guard, but with careful planning and proactive management, it can be avoided. By understanding the factors that contribute to escrow shortages, such as property tax increases, and implementing the tips outlined in this blog, homeowners can ensure that their escrow accounts remain adequately funded. Remember, communication with your lender is key, so don’t hesitate to reach out if you have any concerns or questions regarding your escrow account.