- Who sends it
- Your mortgage servicer, usually with its yearly escrow account statement
- What it starts
- A new monthly payment, starting on the date shown in the statement. A larger shortage must be spread over at least 12 months
- Do this first
- Check the tax and insurance amounts in the statement against your actual bills
What this notice is
Many mortgages have an escrow account (in some places called an impound account). Part of each monthly payment goes into it, and your servicer uses that money to pay your property taxes and homeowners insurance for you. Because taxes and insurance can change from year to year, your escrow payment, and your total payment, can change too.
Federal rules (Regulation X) make your servicer review the account once a year. This review is called an escrow analysis. The servicer then must send you an annual escrow account statement within 30 days after the end of the escrow year. The statement shows what went into and out of the account last year, what the servicer expects to pay next year, your old and new monthly payment, and how any shortage or deficiency is to be paid.
The servicer must tell you at least once a year if there is a shortage or deficiency. That can be part of the annual statement or a separate letter.
Shortage, deficiency and surplus: what the words mean
- A shortage means the account balance is lower than the target balance the servicer needs to cover next year's bills plus any cushion. The account still has money in it.
- A deficiency means the account balance went below zero. That happens when the servicer paid a tax or insurance bill with its own money because the account ran dry.
- A surplus means there is more in the account than needed. If you are current (paid within 30 days of the due date), the servicer must refund a surplus of $50 or more within 30 days of the analysis.
- A cushion is extra money the servicer may keep in the account for surprises. Federal rules cap it at one-sixth of the year's expected bills, which is about two months of escrow payments. Your loan papers or state law may set a lower cap.
How a shortage raises your payment, and the rules on paying it back
Your new payment usually goes up for two reasons at once. First, the servicer collects one-twelfth of next year's expected tax and insurance bills each month, so if your taxes or premium went up, that part goes up. If the servicer knows next year's bill it must use that amount; if not, it may use last year's bill, or last year's bill adjusted by no more than the latest yearly change in the Consumer Price Index. Second, the servicer may add a monthly amount to make up the shortage.
Federal rules limit how fast the servicer can collect a shortage when the analysis is done:
- If the shortage is less than one month's escrow payment, the servicer may let it ride, ask you to repay it within 30 days, or spread it over at least 12 monthly payments.
- If the shortage is one month's escrow payment or more, the servicer may let it ride or spread it over at least 12 monthly payments. It cannot require you to pay it all within 30 days.
- A deficiency of less than one month's escrow payment may be collected within 30 days or in two or more monthly payments. A larger deficiency may be collected in two or more equal monthly payments.
- These deficiency limits apply only if you are current. If the servicer has not received your payment within 30 days of the due date, it may collect a deficiency as your loan papers allow.
If you want to pay the shortage in one lump sum so the monthly add-on goes away, ask your servicer in writing whether it will accept that and what your new payment would be. The rules above limit what the servicer can demand from you; they do not stop you from offering to pay sooner.
What to do this week
- Find your new payment amount and the date it starts. Update any automatic payment so you do not send the old, lower amount. In most cases a payment that does not cover principal, interest and escrow is not a full payment, and you can fall behind.
- Compare the statement to your real bills. Check the property tax amount with your county tax office and the premium with your insurance company. A wrong tax bill, a policy paid twice, or a premium for a policy you replaced can create a false shortage.
- If something is wrong, call your servicer first and ask for a corrected statement. Write down the date, the name of the person and a reference number.
- If the call does not fix it, send a written notice of error to the address your servicer uses for errors and information requests (it may differ from the payment address). The servicer must acknowledge it within 5 business days and generally respond within 30 business days. Keep making your payments while you wait.
- If the higher payment is more than you can afford, call your servicer and ask to apply for help before you miss a payment. See the options to avoid foreclosure, and use the hardship letter tool to explain what changed.
- Call a free HUD-approved housing counselor at (800) 569-4287 for help reading the statement and budgeting for the new payment.
Is this the same in every state?
The escrow rules are federal, so the annual statement, the shortage and deficiency limits and the error process are the same in every state. Two things vary by place: your property tax bill, which your county or city sets, and the cushion, which your loan papers or state law can set lower than the federal cap.
If you are already behind, your servicer may not have to send an annual statement while you are more than 30 days late, in foreclosure or in bankruptcy. Once you catch up, it must send you an account history within 90 days. If you are behind, read the late payment notice page and look up your state's foreclosure timeline.
Scams tied to a payment increase
A sudden jump in your payment can make you a target. Watch for:
- Anyone who calls or texts about your "escrow shortage" and asks you to pay them, or to pay by gift card, wire or a payment app. Pay only your servicer, using the address or website on your own statement.
- Anyone who asks for a fee before you have signed an agreement with your servicer. A company that is not your lawyer cannot charge for mortgage relief until then.
- Anyone who tells you to stop talking to your servicer, your housing counselor or your lawyer.
Read how to spot a foreclosure rescue scam. Report problems with your servicer to the CFPB or by phone at (855) 411-2372.
How much time do you have? It depends on your state.
See the foreclosure timeline, deadlines and free local help for the state where the home is.
Common questions
Can my servicer make me pay the whole shortage at once?
Only if the shortage is less than one month's escrow payment, and then it must give you at least 30 days. A shortage of one month's escrow payment or more can only be spread over at least 12 months, or left alone.
My taxes did not go up. Why is there a shortage?
Common reasons are a higher insurance premium, a tax bill paid in a different installment than last year, a bill the servicer paid late or twice, or an estimate that was too low last year. The annual statement must explain why the expected low balance was not reached. If you still cannot see why, send your servicer a written request for information.
Will I get money back if I pay too much into escrow?
If the analysis shows a surplus of $50 or more and you are current, the servicer must refund it within 30 days. If you are more than 30 days behind, the servicer may keep the surplus in the account as your loan papers allow.
Can I just drop my escrow account and pay taxes myself?
That depends on your loan. Many lenders require escrow, and some loans require it by law. Ask your servicer. If your loan allows it, you would need to save for the full tax and insurance bills yourself.
Keep reading
- Late notice and early intervention letterThis letter is a warning, not a foreclosure. Federal rules make your servicer reach out early and tell you about help. In most cases a foreclosure cannot start until you are more than 120 days behind, so this is the best time to act.
- Breach letter (demand or notice of intent to accelerate)A breach letter says you are in default and gives you a date to catch up. If you do not, the lender can call the whole loan due and move toward foreclosure. Many standard mortgages and deeds of trust require at least 30 days to cure.
- Notice of defaultIn many states that foreclose without a court, a recorded notice of default is the official start of the foreclosure. It is not a sale and not an eviction. It starts a waiting period before a sale can be set, and you can usually still catch up or apply for help.
- Notice of intent to forecloseMany states make the lender send a warning letter before it can start a foreclosure. These letters often give you a set number of days, a cure amount and a list of free counselors. The deadline in the letter matters, so act on it now.
- Lis pendens (notice of pendency)A lis pendens is a public notice, filed in the land records, that a lawsuit or foreclosure affecting your home is pending. It does not mean the home is sold or that you must move. It usually means the court papers are coming or have already been served.
- Foreclosure summons and complaintA summons and complaint means the lender has sued to foreclose. You have a short, firm deadline to respond in writing, often 20 to 30 days from the day you were served. Missing it can let the lender win without your side being heard.
Sources
- 12 C.F.R. § 1024.17, escrow accounts (eCFR)
- 12 C.F.R. § 1024.35, error resolution procedures (eCFR)
- 12 C.F.R. § 1024.36, requests for information (eCFR)
- CFPB: What is an escrow or impound account?
- CFPB: Why did my monthly mortgage payment go up or change?
- CFPB: How do I dispute an error or request information about my mortgage?
- Fannie Mae/Freddie Mac Form 3005, California Deed of Trust (07/2021), sections 3, 5, 9 and 20
- CFPB: Find a housing counselor
- CFPB: Submit a complaint