Definition
Sometimes your lender discovers they didn't collect enough money in escrow to cover taxes and insurance increases. They'll increase your monthly payment or ask for a lump sum to cover the shortage.
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An escrow shortage occurs when the lender's annual analysis reveals that the current escrow account balance, combined with projected monthly contributions, will be insufficient to pay upcoming taxes or insurance bills. This typically happens when property taxes or insurance rates increase significantly. The lender will notify the borrower and either increase the monthly payment to build up reserves or allow payment of the shortage through a lump-sum or spread over several months.
Pro Tip
Budget for potential escrow adjustments annually. Property tax increases and insurance premium hikes cause these regularly.
Example
Property taxes increased 15% from $3,000 to $3,450 annually. The escrow analysis revealed a $600 shortage. The borrower's monthly payment increased by $50 per month to cover the shortage over 12 months.