What is the escrow cushion, and why might lenders require it?

What is the escrow cushion, and why might lenders require it?

• A. Escrow cushion is a penalty for late tax payments.
• B. An escrow cushion is extra funds in escrow to handle increases in taxes or insurance; helps ensure adequate coverage.
• C. It is a reserve for borrower's personal expenses.
• D. It reduces the loan-to-value ratio.

Answer: (B)

The escrow cushion is extra funds kept in the mortgage escrow account to cover potential increases in property taxes and homeowners insurance, ensuring there are enough funds to pay those bills even if costs rise. Lenders require it to reduce the risk of a shortfall in the escrow account and to keep timely payments on taxes and insurance, protecting the lender’s security. The cushion helps absorb increases without immediately forcing a large rise in monthly escrow payments, and it lowers the need for frequent escrow adjustments. It isn’t a penalty for late taxes, a personal expense reserve, or a way to alter the loan-to-value ratio.

The escrow cushion is extra funds kept in the mortgage escrow account to cover potential increases in property taxes and homeowners insurance, ensuring there are enough funds to pay those bills even if costs rise. Lenders require it to reduce the risk of a shortfall in the escrow account and to keep timely payments on taxes and insurance, protecting the lender’s security. The cushion helps absorb increases without immediately forcing a large rise in monthly escrow payments, and it lowers the need for frequent escrow adjustments. It isn’t a penalty for late taxes, a personal expense reserve, or a way to alter the loan-to-value ratio.