What Happens When the Escrow Doesn't Cover All the Insurance?

Most mortgage lenders require an escrow account to handle property taxes and insurance. You pay into the account with every mortgage payment. When the premiums or taxes are due, the lender pays them from your account. If your mortgage payments are current, the lender must make the payments, even if there is not enough money in escrow, creating a deficiency in the account.

The escrow account manages payments for taxes, insurance and some other expenses, like flood insurance or homeowners association fees. The lender determines your monthly escrow payments by totaling the annual expenses and dividing by 12. If any of these premiums increase, the money in the account may not be sufficient for the coming payment. When the mortgage company cannot pay the insurance premium from the escrow account, it will cover the payment and then recover the money from you. If the shortage is less than one month's escrow fee, your lender may require you to reimburse the amount within 30 days or choose to spread the shortage out over the next year. If the shortage is more than one month's escrow payment, your lender may require you to repay the funds over the next two to 12 months.

Through oversight, the lender may neglect necessary payments. This often happens when your lender transfers your loan to a different institution. In order to avoid insurance cancellation or overdue tax fees, you must act quickly. If you receive a delinquency notice, the American Homeowners Association suggests that you contact your lender and demand it pay the premium. If your homeowners insurance company cancels your policy, you may have trouble replacing it, and you will have no protection in the meantime. Monitor the new owner of a transferred loan to make sure the records transferred correctly and the lender is making the payments.

Federal law allows lending institutions to collect the necessary amount to cover expenses, plus up to one-sixth more as a cushion. Not all lending institutions require the extra funds. However, the extra money helps prevent a deficiency.

Your lender should send you an escrow analysis at least once each year. Some include it on each monthly statement. The analysis lists each of your payments throughout the year and all payouts from the escrow fund. Study this document to verify that the lender paid all the premiums. If you notice increases in taxes or insurance premiums, expect an increase in your required escrow payments.

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