Escrow Waiver: Is It Right For You?
When you take out a mortgage, most lenders set up an escrow account, which is a savings account used to cover your estimated property taxes and homeowners insurance each year. Most government-backed loans require an escrow account, but if you have a conventional mortgage, your lender can decide whether it’s necessary.
If you would prefer to pay your property taxes and homeowners insurance yourself, you can request an escrow waiver. Understanding how an escrow waiver works will help you determine whether it’s the best choice for your situation.
What Is An Escrow Waiver?
An escrow waiver removes the lender’s responsibility to maintain an escrow account and pay property taxes and insurance on your behalf. Instead, you’ll cover these expenses on your own, making separate annual payments for property taxes and homeowners insurance when they’re due.
Getting your escrow waived will lower your monthly mortgage payments, but it won’t actually save you any money. Instead, you’ll be responsible for saving money on your own so you aren’t short on funds when your property taxes and home insurance are due.
Escrow Waiver Requirements
Whether you qualify for an escrow waiver with origination depends on the following factors.
- Your mortgage amount
- If your property is in a flood zone
- Your credit score (the VA requires a minimum 620 FICO® Score)
- Your LTV (maximum 95% for conventional and VA loans)
- If your taxes are delinquent
If you wish to remove an escrow account after it’s been established, you need to meet these qualifications:
- An maximum loan-to-value ratio (LTV) of 80% for removal from a conventional loan.
- If your mortgage is backed by Fannie Mae, Freddie Mac or the VA, the loan must be at least 1 year old.
- You must be current on your mortgage with no 30-day late payments in the last year, for Fannie Mae and VA loans. Freddie Mac loans require no 30-day late payments in the last 6 months.
- You must have a positive escrow balance.
- You can’t have any payments scheduled to come out of your escrow within the next 45 days.
- You’ll be required to let your lender reserve escrow collection if you don’t pay any items that were previously in an escrow account.
Keep in mind, there are also several state-specific restrictions. It’s best to consult a loan expert in your area.
Escrow Waiver Fee
If you qualify for an escrow waiver, you may need to pay a fee to account for the additional risk your lender is taking on. Most lenders will charge this fee as a small percentage of the total loan amount or as a slightly higher interest rate.
Which Home Loans Can You Get An Escrow Waiver For?
Whether you qualify for an escrow waiver will largely depend on your loan type. For example, FHA and USDA loans don’t offer waivers, but VA loans do. However, since VA loans don’t come with any down payment requirements, it’ll be difficult to qualify for an escrow waiver if you don’t have sufficient equity in your home.
If you have a conventional loan, it’s up to your loan to determine whether you qualify for an escrow waiver. Since these loans are conforming loans, they must also meet requirements set out by Fannie Mae and Freddie Mac. The typical requirements to remove an existing escrow account are:
- LTV below 80%
- Your loan is at least 1 year old
- Your account in in good standing and you’re current on your mortgage payments
- No loan modifications
- You have a positive escrow balance
- You don’t have any escrow payments scheduled in the next 45 days
- You have a good credit score
What To Consider Before Waiving Escrow
While an escrow waiver may sound enticing, there are drawbacks homeowners should consider first. Here are the biggest pros and cons of waiving escrow.
Most borrowers choose to waive their escrow accounts so they’ll have more control over their finances. Since you’re saving the funds yourself, you’ll have the ability to earn interest on anything you save. In comparison, you won’t earn any interest on the money in your escrow account.
Waiving your escrow requirements will also cause your monthly mortgage payments to decrease. And if you apply for an escrow waiver when buying a home, it can help you reduce your closing costs.
An escrow waiver could be the right choice for some borrowers. But you’ll be putting yourself in a difficult financial situation if you waive escrow and aren’t prepared to pay your property taxes and homeowners insurance annually.
If you’re considering an escrow waiver, it’s a good idea to review your property taxes first. And you should honestly consider whether you’re up to the task of managing the payments on your own. Most borrowers will find that it’s easier to let their lender manage their taxes and insurance for them.
The Bottom Line
An escrow waiver allows you to pay your property taxes and homeowners insurance on your own. When you save the funds yourself, you have the opportunity to earn interest on any money you save.
But there are significant consequences if you miss a payment, so it isn’t an option for all borrowers. If you’re ready to begin your home buying journey, you can start a mortgage application today.