With a Little Help From my Lender
If, for instance, your property is destructed by fire, a lender will have lost his collateral. If this happens and you have not paid your taxes, your state can foreclose on your property in order to obtain payment and the lender could lose his collateral. Therefore, the lender will want to make sure your insurance premium and property taxes are always paid. The Real Estate Settlement Procedures Act sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. The lender will review the amount in the escrow account annually and notify you of a shortage or excess.
The Real Estate Settlement Procedures Act is a consumer protection statute that covers one-to-four family residential property purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. Section 10 of the RESPA limits the amount of money a lender may require the borrower to hold in an escrow account.
RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs or lenders may require escrow accounts as a condition of the loan. If you have a Conventional Loan and you do not have PMI (Private Mortgage Insurance), you have the option to close your escrow account and make your own tax and insurance payments.
If you have a VA or FHA loan, the maintenance of an escrow account was a condition for the funding of your government-insured loan. In this case, the escrow account will not be changed whatsoever.
Your escrow account payments may include an extra amount to ensure that the lender has enough money to make the payments when due. RESPA does not require lenders to maintain a cushion and limits the amount of the cushion to one-sixth of the total amount of items paid out of the account.