An escrow shortage is when there is less funds in your escrow account than what was used throughout the year. Your mortgage escrow account holds funds for your property insurance and taxes. Your lender will dispurse these funds as the payments become due, paying the homeowner's insurance and taxes.

If you set-up a mortgage escrow account with your lender when you obtained your loan, then a portion of the amount you pay monthly goes to an escrow account.

Where most people get into trouble and fall into an escrow shortage is when the property taxes, or insurance increase.