Understanding escrow deficiencies 

In this article: 

• What is an escrow deficiency? 
• Why escrow deficiencies happen 
• Options for resolving an escrow deficiency 

Most homeowners are familiar with escrow shortages — but escrow deficiencies can feel more alarming because they indicate your escrow account has already gone negative at some point during the year. If you've received a notice saying your escrow account has a deficiency, don’t worry. This situation is more common than you might think, and it can be resolved with a few straightforward steps. 

At Desert Financial, we believe you deserve clear, simple explanations about every aspect of your mortgage. This article explains what an escrow deficiency is, why it happens and how you can fix it while keeping your monthly budget on track. 

What is an escrow deficiency? 

An escrow deficiency occurs when the funds in your escrow account were not sufficient to cover a tax or insurance bill that came due. In these situations, Desert Financial may advance the necessary funds on your behalf to ensure the bills are paid on time. 

This temporary negative balance becomes part of your annual escrow analysis. Your new monthly mortgage payment will include adjustments designed to bring your escrow account back to the required level. Key difference: 

• A shortage means you will not have enough money in the future. 
• A deficiency means your escrow account was already negative during the year. 
• You can have both a shortage and a deficiency depending on the situation. 

Why do escrow deficiencies happen? 

Several common and often unavoidable factors can cause your escrow account to go negative. 

1. A tax bill was higher than expected. Counties and municipalities sometimes increase property taxes without much warning. If the bill is higher than the escrow projections from the prior year, your account may not have enough funds to cover the payment. Why this is common: 

• • Rapid home value appreciation 
  • Budget increases 
  • Voter-approved bonds 
  • Adjustments in tax districts 

If the tax bill is due immediately, Desert Financial may pay it on your behalf to help prevent you from late penalties. 

2. Your Homeowners Insurance Premium Increased.  Insurance premiums can rise due to: 

• • Inflation 
  • Updated replacement cost estimates 
  • Regional natural disaster risk 
  • Claims in your area 
  • Companywide rate changes 

If your premium increases significantly, the bill may exceed your escrow account balance — creating a deficiency. 

3. Insurance was switched mid-year 

Switching insurers is a common way to save money, but it can unintentionally affect your escrow account. Here’s one of the most common scenarios: 

1. 1. You cancel your old insurance policy. 
   2. The insurance company mails you a refund. 
   3. You start your new insurance policy. 
   4. Your new premium is paid from escrow. 
   5. But the refund never gets deposited into your escrow account. 

Result? Your escrow account is now short the amount that should have been returned, creating a deficiency. This often catches homeowners by surprise, but it’s easily fixable once identified. 

4. Timing of payments 

Sometimes the timing of tax or insurance payments and monthly escrow deposits can create a temporary negative balance. For example: A bill was due early in the month, but your escrow deposit arrives with your mortgage payment later in the month. In this situation, Desert Financial advances funds to cover the timing gap, but the account shows a deficiency until it catches up. 

How a deficiency is reflected in your escrow analysis 

Your annual escrow statement includes a dedicated section showing whether your account had a shortage, deficiency or surplus. The deficiency amount reflects how far in the negative your account went. Your new monthly payment will adjust to correct both the past negative balance and the future projected need (shortage). 

It’s important to understand that your new monthly payment may increase even if you pay the deficiency in full, depending on this year’s updated tax and insurance costs. 

Your options for resolving an escrow deficiency 

Desert Financial provides multiple options so you can choose the one that works best for you. 

Option 1: Pay the deficiency in full. You can pay the deficiency amount as a one-time payment. Many members choose this option if the deficiency amount is manageable. 

The advantages of this option include: 

• Faster restoration of your escrow balance 
• Helps minimize increases in your monthly payment 
• Reduces the likelihood of future shortages 

Option 2: Spread the deficiency over 12 months. If you prefer to avoid a lump-sum payment, you may spread the deficiency over the next 12 months. This is a good choice for members who need flexibility. Example: If your deficiency is $300, your monthly mortgage payment will increase by $25 for the next 12 months, in addition to any changes from your shortage or new projected costs. The advantages of this include: 

• Smaller incremental changes 
• Budget-friendly option 
• Predictable monthly adjustments 

Option 3: Make a partial payment and spread the rest out. You can pay part of the deficiency upfront and spread the remaining amount over 12 months. It’s a customizable approach that many members find helpful if: 

• They want to minimize their monthly increase. 
• They prefer not to pay the full amount at once. 
• They want to rebuild their escrow balance faster. 

Can an escrow deficiency be prevented? 

While not every deficiency can be avoided, there are several steps you can take to reduce the likelihood: 

• Deposit insurance refunds into your escrow account. Not doing so is the top cause of deficiencies, and it’s easily preventable. 
• Notify DFCU as soon as you switch insurance providers. Provide your new policy’s declarations page early to avoid delays. 
• Pay attention to tax assessment notices. Counties often preview tax changes months in advance. 
• Avoid multiple insurance changes in a single year. Each change increases the chance of timing or refund issues. 
• Review your escrow activity through Online Banking. Monitoring your account helps identify changes early. 

Even with these steps, some deficiencies are simply unavoidable — and that’s okay. They’re a normal part of how escrow accounts work. 

When should you call Desert Financial? 

We’re always here to support you with clear answers and member-first service. Contact Mortgage Servicing at (602) 433-7097 or firstmortgageservicing@desertfinancial.com if: 

• The deficiency amount seems unexpectedly high. 
• You’ve switched insurance recently. 
• Your new payment is difficult to manage. 
• You’re unsure whether to pay in full or spread payments. 
• Your escrow analysis doesn’t make sense or seems incorrect. 

Our team can walk you through your analysis line-by-line, explain how the deficiency occurred, and help you choose the repayment option that’s best for your budget.