Escrow Shortages on New Builds: Why Your Mortgage Payment Can Skyrocket

Buying a brand-new home is exciting—everything is shiny, modern, and customized to your taste. But many new homeowners get blindsided within a year of closing when their mortgage servicer sends an escrow analysis showing a massive payment increase. The culprit? Escrow shortages caused by underestimated property taxes.

Let’s break down why this happens, how builder-affiliated lenders often make it worse, and what you can do to protect yourself.

How Property Taxes Work on New Construction

Property taxes are calculated based on your home’s assessed value. When you close on a new build, the local tax office often hasn’t updated the property record yet, meaning:

• Your tax bill may only reflect land value or a partially completed structure.
• Your lender uses this low bill to calculate your monthly escrow, making your payment look smaller than it really should be.
• When the county reassesses your home at full value, your taxes (and escrow payments) skyrocket.

Real-World Example

• Purchase price: $500,000
• Tax bill at closing (land only): $500/year
• Monthly escrow estimate: $42/month
• Actual taxes after reassessment: $5,000/year
• Corrected escrow: $417/month
• Escrow shortage after 1 year: $4,500+

That “affordable” $42/month escrow payment wasn’t real. Once your home is assessed properly, you’re left with a huge shortage to make up.

Why Builder-Affiliated Lenders Do This

Many builder-affiliated lenders intentionally underestimate taxes to make the payment look as low as possible during the sales process. It’s like a credit card promo:

• Year One: Feels like “0% interest”—low taxes, low payment.
• Year Two: You’re slammed with a “29% interest” effect—a huge escrow shortage plus a corrected payment.

This tactic makes it easier to sell homes, but it sets buyers up for sticker shock.

How Escrow Shortages Are Repaid

Once your servicer finds the shortage, you’ll get two choices:

1. Lump Sum Payment: Pay the entire shortage upfront.
2. Spread It Over 12 Months: Your servicer will add the shortage to your corrected escrow amount.

Example:

• Shortage: $4,500
• Spread over 12 months: $4,500 ÷ 12 = $375/month
• Corrected escrow for taxes: $417/month
• Total new tax escrow: $417 + $375 = $792/month for one year

That’s nearly double what you expected.

How to Avoid Escrow Surprises

1. Request a Tax Estimate Based on Purchase Price
   Don’t rely on the builder’s “current tax bill.” Have your lender calculate escrow based on the home’s actual sales price.
2. Check Your County’s Millage Rate
   Most counties publish tax rates or calculators online. Use them to predict your first full-year tax bill.
3. Budget for Year-Two Adjustments
   Even with good estimates, your first escrow adjustment may still rise. Plan for it in your budget.
4. Save a Cushion
   Setting aside cash for taxes can soften the blow when your servicer recalculates your escrow.

The Takeaway

Escrow shortages on new builds aren’t a tax hike—they’re the county catching up to your home’s full value. Builder-affiliated lenders often make it worse by using unrealistically low tax estimates to make your payment look appealing at closing.

Go in with eyes open, plan for year-two increases, and avoid the shock that catches so many first-time new construction buyers.

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