What Does a Negative Escrow Balance Mean? How to Fix It?

If you’re like most homeowners, you probably have an escrow account as part of your mortgage. This account is crucial because it holds money in your escrow to pay your property taxes and homeowners’ insurance—two major expenses tied to your homeownership. But what happens if you check your escrow analysis statement and see a negative balance? What does a negative escrow balance mean?

Let’s break down what a negative escrow balance signifies, why it happens, and how you can fix it.

What Is an Escrow Account?

An escrow account is a special account managed by your mortgage lender or servicer. It ensures your property-related bills are paid on time. Instead of juggling multiple bills, you make a single monthly mortgage payment, and a portion of that payment amount goes into your escrow account. This covers your tax and insurance payment obligations, which the lender pays when they are due. Isn’t this convenient?

There are two main types of escrow accounts in real estate:

• One is used during the home-buying process to hold earnest money.
• The other is a mortgage escrow account, which is usually required if your down payment is less than 20%.

Lenders prefer this setup because it protects their investment and ensures that critical bills, such as taxes and insurance premiums, are paid on time.

What Does an Escrow Account Cover?

As mentioned, your escrow account is designed to cover recurring homeownership costs, breaking them into manageable monthly payments. These costs typically include:

• Property taxes
• Homeowners insurance
• Mortgage insurance (if your down payment was less than 20%)
• Flood or hazard insurance, if required
• Special assessments or ground rents, in some cases

By spreading these costs over 12 months, you avoid large lump-sum payments and reduce the risk of missing a critical bill.

How Does an Escrow Account Work?

Every month, your mortgage payment is split into two parts:

• The principal and interest on your home loan
• The escrow portion for taxes and insurance

Your loan lender estimates the annual tax and insurance costs and divides that total by 12 to determine your monthly escrow payment. Each year, your lender performs an “escrow analysis” to see if your monthly mortgage payments are enough to cover the actual costs.

If your property taxes or insurance premiums increase, your escrow payments may need to go up. If they decrease, you might see a surplus in your account. It’s as simple as that!

Escrow Shortage vs. Negative Escrow Balance: What’s the Difference?

It’s important to know the difference between an “escrow shortage” and a “negative escrow balance”:

An escrow shortage happens when your account has some money but not enough to cover upcoming bills. For example, if your insurance premium or property taxes rise unexpectedly, you might not have enough in your escrow account to cover the new, higher amount.

A negative escrow balance (also called an escrow deficiency) means your account has dipped below zero. In this case, your lender has already paid your taxes or insurance on your behalf, but there wasn’t enough money in your escrow account to cover the payment. Now, you owe the lender the “shortage amount” plus any future payments.

This situation can feel alarming. However, it’s more common than you might think. Especially if there have been sudden increases in tax or insurance costs, as seen in recent times.

Why Do Negative Escrow Balances Happen?

A negative escrow balance can occur for several reasons:

• Unexpected increases in property taxes or insurance premiums
• Lender-placed insurance, which can happen if your homeowners’ insurance lapses and your lender buys a policy to protect their interests
• Delinquent taxes or insurance bills that weren’t paid on time
• Errors in estimating your annual tax and insurance costs during the escrow analysis

Let’s take an example to understand this. If your annual property taxes jump from $3,000 to $4,000, and your homeowners’ insurance rises from $1,500 to $2,000, your monthly payments may not keep up. Over 12 months, this can create a significant shortage, and if bills are paid before you catch up, your escrow account can go negative.

How to Fix a Negative Escrow Balance?

If you receive an escrow analysis statement showing a negative balance, don’t panic! Your mortgage company will outline your options to resolve the shortage:

• Pay the full shortage amount as a lump sum to bring your account current.
• Spread the shortage over 12 months by adding a portion of the deficit to your monthly mortgage payment.

Some lenders may offer flexible payment plans, so always ask about your options. Remember, paying the shortage quickly is usually best. It prevents your monthly payments from increasing too much. However, if that’s not possible, spreading the payments out can help you budget more easily.

How to Prevent Escrow Shortages and Negative Balances?

The best way to avoid escrow problems is to monitor your account regularly and stay informed about changes in your property taxes and insurance premiums. Here are some useful tips:

• Review your escrow analysis statement every year.
• Keep an eye on local property tax rates and insurance trends.
• Notify your lender if you receive notice of increased taxes or insurance premiums.
• Maintain a small savings cushion to cover unexpected increases in your escrow payments.

If you anticipate higher costs, you can ask your lender to increase your monthly escrow payment proactively, helping you avoid a shortage or negative balance.

Key Takeaways

Understanding your escrow account is essential for smooth homeownership. A negative escrow balance simply means there wasn’t enough money in your escrow account to cover taxes or insurance, and your lender paid the bills for you. 

But don’t worry, there are clear steps you can take to fix the situation and prevent it from happening again.

Stay proactive, monitor your escrow account, and communicate with your lender to ensure your property taxes and insurance bills are always covered. That way, you can enjoy your home without any surprises!

FAQs

Who Should I Contact If I Have Questions About My Escrow Account?

Contact your mortgage servicer directly. They can explain your escrow analysis statement, help you understand your payment amount, and guide you through resolving any escrow shortage or negative balance.

How Can I Settle an Escrow Shortage?

Most lenders let you pay the shortage in one lump sum or spread it over 12 months as part of your monthly payments.

Can There Be a Surplus Escrow Balance?

Yes! If your escrow account has more money than needed (usually $50 or more), you’ll get a refund or a credit toward future payments.

Will My Escrow Payment Change If I Have a Fixed-Rate Mortgage?

Your principal and interest stay the same, but your escrow payment can change if your tax and insurance costs go up or down.

Is It Possible to Opt Out of Having an Escrow Account? What Are the Risks?

Some lenders allow opting out if you have sufficient equity, but you then become responsible for paying property taxes and insurance directly. Keep in mind that this requires disciplined budgeting to avoid missed payments.

Written by Ramona Sinha. April 29, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.