Final answer:
The escrow cushion for taxes and insurance cannot exceed two months of escrow payments, or about 1/6th of the total annual disbursement, as per the Real Estate Settlement Procedures Act.
Step-by-step explanation:
The main answer to the question about the escrow cushion limit for taxes and insurance is that, under the Real Estate Settlement Procedures Act (RESPA), lenders are allowed to require a cushion, but this cushion may not exceed two months of escrow payments, or about 1/6th of the total annual disbursement. This is meant to protect both the lender and the homeowner, ensuring that there are enough funds to cover any potential increases in taxes or insurance premiums without being overly burdensome for the homeowner.To illustrate, if your total annual escrow disbursement for taxes and insurance amounts to $6,000, the maximum escrow cushion that your lender can require would be $1,000, which is roughly two months or 16.67% of your annual escrow payments.In conclusion, it is essential for potential homebuyers to understand this escrow requirement, as it pertains to the management of their mortgage-related expenses.