What is the cushion that must be in escrow?
In real estate transactions, an escrow account is set up to hold funds that will be used for property taxes, homeowners insurance, and mortgage insurance. The cushion that must be in escrow is an amount held by the lender to cover potential increases in these expenses. This cushion acts as a buffer to ensure that there are enough funds in the escrow account to pay for these expenses even if they rise unexpectedly.
FAQs:
1. Why is a cushion required in escrow accounts?
A cushion is required in escrow accounts to protect both the borrower and the lender. It ensures that there are enough funds available to cover any increases in expenses related to the property.
2. How is the cushion amount determined?
The cushion amount is typically equal to two months’ worth of escrow payments. This amount can vary depending on the lender and the requirements of the loan.
3. Can the cushion amount change over time?
Yes, the cushion amount can change over time. Lenders are required to conduct an annual escrow analysis to determine if the cushion amount needs to be adjusted based on changes in expenses.
4. What happens if there is a shortage in the escrow account?
If there is a shortage in the escrow account, the lender may increase the borrower’s monthly payment to cover the deficit. Alternatively, the borrower may be required to make a lump sum payment to bring the account back to the required balance.
5. Is the cushion amount the same for all borrowers?
No, the cushion amount can vary based on factors such as the type of loan, the borrower’s credit history, and the lender’s policies. Some borrowers may be required to maintain a larger cushion amount in their escrow account.
6. Can a borrower request to have the cushion amount lowered?
Borrowers may be able to request a lower cushion amount, but this will ultimately depend on the lender’s policies and the terms of the loan. Lenders may require certain criteria to be met before considering a lower cushion amount.
7. Is the cushion amount separate from the required escrow balance?
Yes, the cushion amount is separate from the required escrow balance. The required escrow balance is the minimum amount that must be maintained in the account to cover future expenses, while the cushion amount is an additional buffer.
8. What happens to the cushion amount if the property taxes or insurance costs decrease?
If the property taxes or insurance costs decrease, the excess funds in the escrow account, including the cushion amount, may be refunded to the borrower. The lender is required to conduct an escrow analysis each year to determine if any surplus funds can be returned.
9. Can a borrower choose not to have an escrow account?
Some borrowers may have the option to waive the escrow account requirement, but this is typically reserved for borrowers who meet certain criteria, such as having a large down payment or excellent credit history. Without an escrow account, the borrower would be responsible for paying property taxes and insurance directly.
10. What happens if a borrower fails to maintain the required escrow balance?
If a borrower fails to maintain the required escrow balance, the lender may take action to bring the account up to the required amount. This could involve increasing the borrower’s monthly payment or requiring a lump sum payment.
11. Can the cushion amount be used to cover other expenses?
No, the cushion amount in an escrow account is specifically designated to cover increases in property taxes, homeowners insurance, and mortgage insurance. It cannot be used for other expenses unrelated to the property.
12. How often should borrowers review their escrow statements?
Borrowers should review their escrow statements annually to ensure that the account is properly funded and that there are no discrepancies. This can help borrowers avoid surprises and ensure that their escrow account remains in good standing.