Escrow Shortage: Why It Happens and How to Fix It



Every year, new home buyers are stumped when they find out that their mortgage payment has increased due to an escrow shortage. They don’t know where the bill came from, or why they’re being asked to pay more when they have a fixed mortgage payment.


An escrow account is a separate bank account where you place the funds to pay for your property taxes, mortgage insurance, and flood insurance (if your state requires it). It’s not normally something you have to think about, because it’s included in your mortgage payment.


The only time you have to worry about your escrow account is if property taxes are raised. But before we get into that, it’s important that you understand how property taxes work.


Millage Rates


Millage rates are the rates used to calculate local property taxes. They take into account your millage code and the assessed value of your property to determine how much you owe in property taxes.


Seeing as how millage rates affect property taxes, and property taxes fund schools, it’s not surprising how well-to-do neighborhoods get more funding when compared to other neighborhoods.


Why Homestead Exemptions are Important


First-time homeowners who qualify for homestead exemptions can claim up to $50,000 on a property’s taxable value. This saves homeowners money by decreasing their property taxes, and can be renewed once a year if homeowners are still eligible.

All property benefits need to be applied for by March 1st.


Who Sets Property Taxes?


Property taxes are set each year by local governments. By law, county governments must alert homeowners of the dates and times that hearings will be held to determine property taxes. Homeowners are alerted of property tax hearings in August, through a letter in the mail.


Annual Truth-in-Millage Notice (TRIM)


A TRIM notice will contain the following information:

  • Updated property value (as determined by a property appraiser on January 1st)

  • Proposed millage rates

  • An estimate of the property taxes homeowners will have to pay

The date, time and location of budget hearings will also be made available to homeowners. Since property tax budget hearings are held in September and taxes are set on October 1st, this gives homeowners enough time so that they can attend and comment on proposed pricing.


Value Adjustment Boards


If a homeowner attends a budget hearing, and doesn’t like what they hear, they have the right to appeal to a Value Adjustment Board. These are local, five member boards specific to each county. They operate independently of tax collectors and property appraisers to ensure a fair hearing without bias.


This is the only time you can challenge an assessment of a property’s value.


Your Property Tax Bill Due Date


Every year, on January 1st, property appraisers update property values. They apply all exemptions, classifications, and assessment limitations to determine your property’s taxable value.


Then, county tax collectors mail out property tax bills—usually in late October or November.

Your property tax bill is due by March 31st. If paid early, you can receive up to 4% off on your property taxes. One of the reasons behind this incentive is that 50% of all school funding comes from property taxes. If not properly managed, you'll have an escrow shortage on your hands.


How to Avoid an Escrow Shortage


To avoid an increased payment in your monthly mortgage, be proactive by keeping an eye out for a letter from a property appraiser in January. Keep in mind your deadline (March 31st), and make sure to apply for property benefits by March 1st.


Also, be aware of insurance rates. Florida is well known for having few homeowner insurance providers, which has made insurance rates spike. Remember too, that every August you’ll receive a TRIM notice, which will let you know your proposed property tax increase.


You can choose to attend the budget hearing and then appeal the pricing proposal with the Value Adjustment Board. Or, you can plan ahead and set aside extra money in a separate savings account that you can use once March 31st rolls around.


More Escrow and Property Tax Tips


  • If you’ve just bought a home, a change in ownership can reset the assessed value of the property to full market value.

  • Homestead exemptions can only be applied to primary residences. Don’t try to rent your property out once you buy it.

  • If you fail to pay your property taxes, you could have a lien placed against your property. Your property deed can then be sold in a tax deed sale, and you can risk losing your home.

  • Unlike an escrow shortage, an escrow deficiency is when you have a negative balance in your escrow account. This means that you’ll have to pay the negative balance as well as what you currently owe in terms of property taxes.