Federal Laws on an Unexpected Tax Escrow

Your real estate taxes are set by your county, sometimes with state guidance to make them uniform, but they vary widely by geographic area. Your mortgage lender usually collects a monthly escrow fee to build up money to pay these taxes each year when the bills come in. If your county increases tax rates, changes the assessed value of your home or imposes a special tax, your tax escrow may jump suddenly.


Federal laws do not affect local real estate taxes, which change as local authorities add new taxes or raise rates. However, federal laws may require you to maintain an escrow account to pay taxes. Most loans insured by the Federal Housing Administration or another government agency require such an account.

Annual Tax Plus Cushion

Monthly escrow charges for taxes are calculated on previous tax bills. Federal law allows a lender to collect 1/12 of the annual tax bill, plus a "cushion" equal to two months payment. If your annual taxes are estimated at $1,200, you'll pay $100 a month in escrow, with an extra $200 as a cushion. Those charges will change with any adjustment in your local taxes. For example, an increase of $50 a month in tax escrow will add $100 to the allowable cushion.

RESPA Limits Cushion

The only federal law affecting an unexpected increase in your tax escrow is the Real Estate Settlement Procedures Act. This governs the two-month cushion. It allows your lender to increase your escrow charge if your taxes go up. If an unexpected jump causes an escrow shortage, you have the option to pay the shortage in a lump sum or have the lender allocate it in future monthly charges.

Annual Tax Statement

Your lender must give you an annual escrow analysis statement, showing how much was collected and how much was paid out for various bills. This should explain any tax increase you weren't expecting. The statement should detail how much was paid for taxes and when the payment was made and show any difference between what was estimated and what was actually paid. You usually receive a tax statement from your local tax authority to explain any increases.

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