If you’ve ever wondered why lenders sometimes ask for more money than seems necessary to set up your escrow account, the answer is simple: RESPA rules.
The Real Estate Settlement Procedures Act (RESPA) sets the guidelines for how much your lender can collect — and yes, they’re allowed to take more than just the bare minimum.
What RESPA Allows
Under RESPA, lenders can require:
- Enough money to cover the upcoming bills (like property taxes and insurance).
- Up to two extra months of escrow payments as a cushion.
That cushion is their safety net in case your taxes or insurance increase. It ensures the account never runs negative, which would put them at risk.
How This Plays Out at Closing
Let’s say your property taxes are $6,000 annually ($500/month).
- You’re closing in July.
- The next tax bill is due in December.
- By then, you’ll only have made 5 payments = $2,500 in escrow.
- The bill is $6,000, so the lender is short $3,500.
- At closing, they collect that $3,500 upfront.
- Then, they add up to 2 months more ($1,000) as a cushion.
Total = $4,500 in escrow costs — not just the $3,500 you expected.
Even “Low Escrow” Months Still Have Cushions
Even if you close in November or December, when it seems like the timing works out, you’ll almost always see at least 1–2 months of taxes collected upfront. That’s the cushion at work.
Why Buyers Get Caught Off Guard
Most buyers hear “your lender will escrow for taxes and insurance” and think that means it’s just rolled into their mortgage payment. Technically, that’s true — but the setup costs at closing are what surprise people.
House Karma Tip
Don’t think of escrow as just “part of your mortgage.” It’s an account your lender controls — and they always want to be sure it’s padded with enough to cover surprises. Plan for the cushion.
Bottom line: RESPA rules are there to protect lenders, not necessarily to make your life easier. But if you understand them, you won’t be shocked when your closing costs include more escrow money than you thought.
