VA loans have a variety of requirements–some of which the borrower may not understand fully until they have the rules explained properly.

Sometimes there is confusion over what the rules mean, other times the confusion comes because VA loan guidelines often establish minimum requirements that a lender may have a higher standard for–the borrower is not forced to lower lending standards to accommodate minimums set by the VA in areas such as credit score.

And then there are areas that do not have VA requirements but are legally required by the lender. One of these is the establishment of an escrow account to handle issues such as property tax payments. The Department of Veterans Affairs does not require escrow to be used, but many lenders do.

In Section 10 of the Real Estate Settlement Procedures Act (RESPA), there is a limit placed on the amount of money a lender may require the borrower to hold in escrow. RESPA also requires the lender to give the borrower statements for the initial balance and then issue annual reports.

The RESPA laws don’t require a “cushion”, but does permit lenders to require one, “equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails” according to the Department of Housing and Urban Development official site.

Something to keep in mind about escrow–in some cases a borrower may not have been required to keep the maximum amount allowed by law in escrow. Under current economic conditions some lenders may now be requiring the maximum allowable amount.

According to HUD.gov, “Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.”

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