When you secure a mortgage, it’s common to also have an escrow account. Most lenders and servicers mandate borrowers to establish an escrow account, especially if they’ve made a low down payment or possess limited equity in their home.
However, even though an escrow account simplifies the process of setting aside funds for property taxes and homeowners insurance, there are instances where you might secure a loan without one or even opt to detach an escrow account from your existing mortgage.
To achieve this, you’d have to meet the criteria for an escrow waiver. Let’s delve deeper into this topic in the following section.
Lenders and servicers often set up escrow accounts to guarantee that your property taxes, homeowners insurance, and, when relevant, other insurance types are settled.
When you possess an escrow account, the costs for your annual insurance premium and property tax bill are divided into 12 uniform installments. These are then combined with your monthly mortgage payment, which also covers any principal and interest on the mortgage itself. The funds designated for property taxes and homeowners insurance are directed into your escrow account. From there, the lender will allocate these funds to settle those bills on your behalf.
This arrangement typically benefits both the lender and the borrower. The lender safeguards their investment by ensuring that taxes and insurance are paid. Simultaneously, the borrower is relieved from the burden of paying these substantial amounts in a payment in one lump sum.
Yet, for homeowners who’d rather handle these payments personally, exploring the possibility of an escrow waiver might be appealing. This waiver grants homeowners the autonomy to manage these payments without the mediation of an escrow account.
When you obtain an escrow waiver, your property taxes and homeowners insurance are excluded from your monthly payment. Instead, you’ll shoulder the responsibility of settling these bills in payment in one lump sum, usually as the year concludes.
This setup can be advantageous or perilous, contingent on your foresight and financial planning. You might opt to retain the funds until they’re due, possibly placing them in an account with interest earnings. On the flip side, if you neglect to set aside funds in advance, you might face a substantial financial strain when the payment deadline approaches.
Should you fall behind on your taxes or insurance payments, your lender is likely to rescind the escrow waiver and mandate contributions to an escrow account.
When you secure a mortgage, your property serves as the security for that loan. Hence, until the mortgage is fully settled, your lender holds a significant stake in your property. But what prompts lenders to be concerned about your other financial obligations?
The reason lies in the risk associated with neglecting property taxes or homeowners insurance payments, which jeopardizes the lender’s investment.
In terms of lien precedence, taxes usually overshadow mortgages. This means that if you become severely delinquent on your property taxes and a tax sale is initiated by the local tax authority, the lender’s entire investment in the property could be lost.
To mitigate this risk, lenders establish an escrow account on your behalf, ensuring that your property taxes are paid punctually.
The rationale behind escrowing homeowners insurance is analogous. For instance, if a fire severely damages or destroys your home, your obligation to the mortgage remains. However, the value of the lender’s collateral—your home—diminishes drastically. By mandating homeowners insurance and overseeing the payment of premiums, lenders safeguard their investments.
Your eligibility for an escrow waiver hinges on multiple determinants, such as:
Should you qualify for an escrow waiver, be prepared to cover an escrow waiver fee. This fee is typically a fraction of your loan’s total value.
It’s essential to note that specific payments are mandated to be escrowed. For instance, if you hold a conventional loan with private mortgage insurance (PMI), this payment must be processed through an escrow account. Similarly, residents in flood-prone areas, obligated to maintain flood insurance, might also need an escrow account.
Yet, even if certain payments, like mortgage insurance, necessitate an escrow account, you might have the option to exclude standard homeowners insurance premiums, property tax payments, or both from this account. This means that even if you can’t entirely eliminate your escrow account, you can potentially reduce your monthly contributions.
Next, we’ll delve into the escrow waiver prerequisites based on the loan type. It’s important to remember that these requirements can differ depending on the lender and the state’s regulations.
Conventional loans are a type of mortgage loan that isn’t underwritten by any government entity. A majority of these loans are recognized as conforming, implying they adhere to the standards set for resale to government-affiliated entities like Fannie Mae and Freddie Mac.
This signifies that when you opt for a conventional loan, the decision to grant an escrow waiver isn’t solely based on your lender’s regulations or your state’s laws. It might also need to align with the stipulations of these government-sponsored enterprises regarding escrow accounts.
To be eligible for an escrow waiver with a conventional loan, typically, you must:
However, these are broad guidelines. Individual lenders might have criteria that are either more relaxed or stricter. Shortly, we’ll delve into the explicit prerequisites for escrow waivers, particularly for Fairway Mortgage loans.
Federal Housing Administration (FHA) loans do not qualify for an escrow waiver. Those who take out such loans are mandated to maintain an escrow account for the entire loan duration.
Nevertheless, once you accumulate 20% equity in your home, considering a refinance into a conventional loan might be advantageous. This move not only opens the door to potentially eliminating your escrow account but also relieves you from the obligation of the FHA mortgage insurance premium, commonly referred to as MIP. This specific mortgage insurance is typically a requirement for the entirety of the loan, irrespective of the equity percentage you hold in the property.
Veterans Affairs (VA) loans are mortgage financing options supported by the Department of Veterans Affairs. While the VA doesn’t mandate the use of escrow accounts for these loans, it’s common for lenders to do so.
The escrow waiver stipulations for VA loans are often akin to those for conventional loans. However, given that a primary advantage of a VA loan is the ability to secure a home purchase without a mandatory down payment, many loan recipients might lack the necessary equity in their home to be eligible. At Fairway Mortgage, those with VA loans need a minimum of 10% equity in the home to meet the criteria.
Your eligibility for an escrow waiver hinges on multiple considerations. Here are some primary prerequisites we have in place, but for insights tailored to your unique circumstances, it’s best to consult with your Home Loan Expert. Additionally, regional regulations might influence escrow waiver policies, potentially introducing more stipulations.
For the removal of your escrow account from your mortgage, the following are typically required:
Pro Tip: Learn about Fannie Mae’s requirements to waive an escrow account here
Choosing an escrow waiver can be attractive for homeowners desiring greater autonomy over their financial transactions and payments. Let’s delve into the perks of opting out of your escrow account.
While certain states mandate lenders to remit the interest accrued on funds held in an escrow account to borrowers, many states don’t have this stipulation. (It’s worth noting: Fairway Mortgage doesn’t derive any interest earnings from your escrow account.)
Some borrowers prefer to set aside the funds they’d typically channel into their escrow account into their personal interest-generating account. This way, their money can grow until it’s time to settle their bills.
Lenders aim to confirm that buyers possess sufficient funds to address the property taxes and homeowners insurance expenses upfront. During the closing process, these charges are incorporated to establish a reserve for these payments.
However, when the escrow is waived, these expenses are excluded from the overall closing costs.
For those who favor direct management of their property taxes and insurance dues, or for individuals with variable incomes requiring adaptability, pursuing an escrow waiver might be a prudent choice.
For certain homeowners, the pressure of organizing their property taxes and insurance dues ahead of time makes them hesitant about opting for an escrow waiver. Let’s delve deeper into the potential disadvantages of waiving escrow.
Choosing to waive an escrow account means you’ll have to strategize your savings.
On average, an annual homeowners insurance premium stands at approximately $1,200, as per figures from the National Association of Insurance Commissioners. However, this amount can fluctuate based on your location, your home’s valuation, and the extent of your coverage. In 2022, the mean property tax bill for standalone homes was $3,901, as indicated by ATTOM Data Solutions.
Cumulatively, this amounts to roughly $5,000. A significant advantage of escrow accounts is the elimination of the need to set aside over $400 monthly. When integrated into your monthly mortgage payment, this saving process is seamlessly automated.
An escrow account offers genuine convenience – your main task is to complete your mortgage payment monthly, and your lender or service provider manages everything else.
Without an escrow account, you’ll be responsible for overseeing this, which entails monitoring the due dates of your payments.
Prior to approaching your lender or service provider about an escrow waiver, ensure you’re equipped to manage budgeting in advance and independently for property taxes and insurance expenses. Opting out of an escrow account can offer advantages due to the added flexibility, but it might also pose risks if you don’t strategize in advance. It’s crucial to evaluate both the benefits and drawbacks and consult with your lender about your eligibility.
