The Real Estate Settlement Procedures Act (RESPA) addresses escrow accounts and the amounts that a lender may hold for payment of the borrower’s real estate taxes, homeowner’s insurance, and other items. A lender may retain a cushion, but the amount of the cushion a lender can maintain is limited by Section 10 of RESPA. Following are some common questions people have about escrow accounts and some answers.

Does RESPA require an escrow account to be maintained?

No, RESPA does not require that borrowers maintain an escrow account. A lender, however, can require the borrower to escrow for taxes, insurance, etc. as a condition of providing the loan. The borrower may also be permitted to elect to establish a deposit account of funds (pledging an amount upfront for these items) or elect to pay them directly.

If an escrow account is maintained with the lender, does RESPA require the lender to hold an amount as a cushion?

Although lenders will likely require some level of cushion to make sure the escrow is sufficient to pay the taxes and insurance amounts when they become due, RESPA does not the lender to maintain a cushion. RESPA only sets a limit on the maximum amount a lender may require a borrower to maintain a balance in the account.

How do I estimate the amount my lender may require for my escrow account?

Determine the projected tax bill and homeowner’s insurance bill and when they will become due. Then create a monthly schedule for the next twelve months showing the amount to be paid into your escrow account each month, the amount to be paid out fo