How many months of cushion reserve can a lender collect on an escrow account?

A lender can collect up to two months of cushion reserve in an escrow account to cover any potential shortfalls in the escrow payments used for property taxes and insurance. This cushion acts as a safety buffer, ensuring there are sufficient funds in the account to meet future payments even if there are unexpected increases in taxes or insurance premiums.

Regulations specify this two-month reserve to limit the potential financial burden on borrowers while still allowing lenders to manage risk effectively. This practice helps ensure that borrowers do not face sudden payment demands and that lenders can maintain sufficient funds to cover anticipated expenses related to the property.

Understanding this aspect of escrow accounts is crucial for mortgage loan officers, as it impacts both loan structuring and the overall affordability for borrowers.