When you obtain a mortgage, you sign documents that list your monthly principal and interest payments. However, if your lender pays your property taxes and homeowner's insurance, you will pay additional money each month into an escrow account. When the term "shortage" is used in relation to mortgages, it typically refers to a shortage in the mortgage escrow account.
The Real Estate Settlement Procedures Act regulates all mortgage escrow account activity. Under RESPA, lenders must calculate your monthly escrow payment based on your total homeowner's insurance and property tax liabilities for the year. RESPA also allows lenders to maintain a cushion in your escrow account for unexpected expenses, but this cushion cannot exceed two monthly escrow payments. Finally, RESPA requires lenders to perform a formal analysis of your escrow account each year to identify overages or shortages.
A shortage occurs when escrow analysis shows that your account balance is lower than it needs to be to satisfy your upcoming property tax and homeowner's insurance obligations, as well as to cover any cushion your lender requires. Shortages may result if you miss mortgage payments, if your property tax or homeowner's insurance bills increase or if your lender incorrectly calculated your payment during the previous escrow analysis.
When the lender finds a shortage in your account, he will require you to repay it. Under RESPA, the lender may require you to pay any shortage that is less than one month's mortgage payment in as little as 30 days, or he may allow you to spread the amount over one year. If the shortage is greater than one month's mortgage payment, RESPA requires the lender to spread repayment over at least 12 months.
If the shortage in your account forces the lender to use its own funds to pay your property tax or homeowner's bills, you have a deficiency, and you may have less time to repay the lender. Under RESPA, lenders can collect deficiencies of less than one month's mortgage payment within 30 days, but they must allow at least two months for a larger deficiency. If your account balance includes a surplus rather than a shortage, the lender must typically refund it to you within 30 days of its discovery. However, the lender may apply surpluses of less than $50 to future escrow payments.
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