What does a deficiency in an escrow account mean?

A deficiency in an escrow account refers to a situation where there is an actual negative balance in the account. This occurs when the funds set aside for paying property taxes, homeowners insurance, or other escrowed expenses are insufficient to cover the payments due. In practice, this means that the borrower has not deposited enough money into the escrow account throughout the year to meet the anticipated expense obligations.

When there is a deficiency, it is necessary for the borrower to rectify this shortfall, typically by paying into the account to ensure that future payments can be made without interruption. This concept is critical for homeowners, as it directly impacts their ability to maintain necessary insurance and tax payments that are essential for the ownership of the property.