Why might lenders require an escrow cushion?

Why might lenders require an escrow cushion?

• A. To penalize borrowers for late payments.
• B. To provide extra funds in escrow to cover possible increases in taxes or insurance.
• C. To fund additional features of the financing.
• D. To increase the loan-to-value ratio.

Answer: (B)

Escrow cushions are extra funds kept in the escrow account to cover changes in taxes and insurance. Lenders require this buffer so there’s enough money to pay property taxes and homeowners insurance even if those bills go up or if estimates are a bit low. Without a cushion, a rise in taxes or insurance could create a shortfall, risking late payments or lapses in insurance, which could threaten the loan’s security. The cushion helps ensure these ongoing costs are covered and can also smooth out payments for the borrower. It’s not about penalties, financing extra features, or changing the loan’s value; it’s about protecting the lender (and keeping payments stable by absorbing some variability).

Escrow cushions are extra funds kept in the escrow account to cover changes in taxes and insurance. Lenders require this buffer so there’s enough money to pay property taxes and homeowners insurance even if those bills go up or if estimates are a bit low. Without a cushion, a rise in taxes or insurance could create a shortfall, risking late payments or lapses in insurance, which could threaten the loan’s security. The cushion helps ensure these ongoing costs are covered and can also smooth out payments for the borrower. It’s not about penalties, financing extra features, or changing the loan’s value; it’s about protecting the lender (and keeping payments stable by absorbing some variability).