What Is An Escrow Waiver And Should You Get One?

If you have a mortgage, you probably have an escrow account.

While an escrow account can make saving for your taxes and insurance more convenient, some homeowners would prefer to make these payments themselves. Though lenders and servicers typically require borrowers to have escrow accounts – particularly if they made a low down payment or have little equity in their home – it’s sometimes possible to get a mortgage without an escrow account, or to have an existing escrow account removed from your loan.

To do this, you’ll need to qualify for an escrow waiver.

Lenders and servicers utilize escrow accounts to ensure that your property taxes, homeowners insurance and, if applicable, other types of insurance are paid.

If you have an escrow account, your annual insurance premium and property tax bill will be spread out across 12 equal payments and included in your monthly mortgage payment, in addition to any principal and interest that you pay on the mortgage itself. Your lender will take this part of your payment and put it into your escrow account to save for when these bills come due, at which point they’ll pay them out of the escrow account on your behalf.

Generally, this setup is beneficial to both the lender and the borrower: the lender protects their investment by ensuring that taxes and insurance are paid, while the borrower doesn’t have to worry about making these payments in one lump sum.

However, if a homeowner prefers to handle these payments on their own, they might see if they can get an escrow waiver. While lenders typically require borrowers to have an escrow account, an escrow waiver renounces this requirement.

If you’re granted an escrow waiver, instead of having your taxes and insurance included as a part of your monthly mortgage payment, you’d be responsible for paying each of your bills in one full lump sum as they become due. Your lender won’t make these payments on your behalf, and instead of paying a little bit of your total amount due each month, you’ll owe the full amount all at once.

This can be useful or risky, depending on how good you are at planning ahead. You might prefer to hold onto the money yourself until it’s due so that you can keep it in an interest-earning account. However, if you fail to save money ahead of time, you might be in for a big shock to your wallet when it comes time to pay.

Your escrow waiver is contingent on you continuing to pay these bills. If at any point you become delinquent on your taxes or insurance, your lender will most likely revoke the waiver and require you to pay into an escrow account as part of your monthly mortgage payment for the life of the loan.

When you get a mortgage, your home acts as collateral for the loan. So until you pay off your mortgage, your lender has a vested interest in your home. But why does it matter to your lender if your other bills are paid?

Not paying your property taxes or homeowners insurance puts the lender’s investment at risk.

When it comes to lien seniority, taxes take priority over mortgages in most cases. So if your local taxing authority forces a tax sale due to severely delinquent property taxes, the lender could completely lose their investment in the home. To avoid this, lenders will typically pay your taxes with their own funds if they have to. At that point, you’ll owe that money to your lender. If you don’t pay them, they may foreclose on your home.

Instead of doing this, it’s less risky for your lender to set up an escrow account for you and handle paying your property taxes on your behalf.

Homeowners insurance is escrowed for a similar reason. If your home gets severely damaged or destroyed in a fire, for example, your mortgage obligation doesn’t go away, but the lender’s collateral becomes much less valuable. By requiring homeowners insurance and ensuring your premiums are paid by having you pay into an escrow account, the lender protects their investment.

Whether or not you’ll qualify for an escrow waiver will depend on many different factors, including your loan-to-value ratio (LTV), the type of loan you have, the type of property you’re in, the lender’s rules regarding escrow waivers, your state’s laws and the details of your individual loan.

If you’re able to get an escrow waiver, you may need to pay an escrow waiver fee, which is equal to a small percentage of your loan amount.

There are also certain types of payments that must be escrowed. If you have a conventional loan with private mortgage insurance (PMI) due to making a down payment of less than 20%, you have to pay that through an escrow account. Likewise, borrowers who live in a flood zone and are required to have flood insurance may not be able to avoid an escrow account.

However, if you have to keep an escrow account for certain required payments, such as mortgage insurance, you can still remove your regular homeowners insurance premium, property tax payments or both from your escrow account if you qualify for a waiver. So even if you’re not able to completely get rid of your escrow account, you can still lower the amount you’ll need to pay each month.

Let’s take a look at the requirements for an escrow waiver by loan type. Keep in mind that requirements vary from lender to lender and state to state.

Conventional Loans

Conventional loans are mortgage loans that aren’t backed by a government program. Most conventional loans are considered conforming, meaning that they meet the guidelines to be sold to the government-sponsored enterprises Fannie Mae and Freddie Mac.

That means that when you get a conventional loan, your ability to get an escrow waiver won’t just be determined by your lender’s rules and your state’s laws – it may also have to conform to the rules these enterprises have regarding escrow accounts.

In general, to qualify for an escrow waiver on a conventional loan, you’ll need:

• LTV below 80% (meaning you have more than 20% equity in your home)
• No recent delinquencies
• No loan modifications
• No previous defaults on an escrow waiver

You may also need to have a good credit score to qualify. These are general guidelines; different lenders may be more or less stringent. We’ll go over the specific requirements for escrow waivers on Rocket Mortgage® loans further down.

FHA Loans

FHA loans aren’t eligible for an escrow waiver.

FHA loans are mortgages backed by the Federal Housing Administration. FHA loan borrowers are required to have an escrow account throughout the life of their loan.

However, once you reach 20% equity in your home, you might find it beneficial to refinance into a conventional loan. Not only will this make removing your escrow account a possibility (though you should check with your conventional loan lender to be sure they offer this option), but you’ll also no longer have to pay the FHA mortgage insurance premium, which is mortgage insurance that typically must be paid throughout the life of the loan, regardless of how much equity you have in the home.

VA Loans

VA loans are mortgage backed by the Department of Veterans Affairs. Though the VA doesn’t have a rule requiring these loans to have escrow accounts, lenders typically do.

For lenders that do allow escrow waivers on VA loans, the requirements are often similar to the ones we already listed for conventional loans. However, because one of the main benefits of a VA loan is getting a home with zero down payment, many borrowers might not have enough equity to qualify. With Rocket Mortgage, VA loan borrowers must have at least 10% equity to qualify.

Whether you’re eligible for an escrow waiver will depend on a variety of factors. These are some of our main requirements, but if you have questions about your specific situation, just ask. Your state may also have laws dictating how and when escrow waivers can be granted, so you may be subject to additional requirements.

To have your escrow account removed, you’ll likely need:

• Less than 80% LTV on a conventional loan; no more than 90% LTV for a VA loan.
• No delinquencies within the last year, and – depending on your investor – no 60-day delinquencies within the last 2 years.
• No loan modifications
• No defaults on previous escrow waivers
• No escrow payments scheduled to come out of your account in the next 45 days
• You can’t have a negative escrow balance
• The loan must be at least a year old

Earn Interest On Your Money

Though some states require that lenders pay borrowers interest earned on the money kept in an escrow account, most states don’t. (Note: Rocket Mortgage doesn’t profit from interest on your escrow account.)

Some borrowers would rather be able to save the money they’re paying into their escrow account and instead place it in their own interest-earning account, where it can accrue cash until they have to pay their bills.

Flexibility And Control

If you prefer to be in control of your property tax and insurance payments, or if you have a fluctuating income and need the flexibility, it might make sense for you to seek an escrow waiver.

Tax And Insurance Can Be Expensive In One Lump Sum

If you want to forgo an escrow account, you need to be good at saving your money.

An annual homeowners insurance premium costs around $1,200, according to data from the National Association of Insurance Commissioners – though it might be more or less depending on where you live, the value of your home and how much coverage you have. The average property tax bill for single-family homes in 2020 was $3,719, according to ATTOM Data Solutions.

Together, that’s almost $5,000. Depending on your situation, you may owe more. Part of what makes escrow accounts so convenient is that it can be hard to commit to saving $400+ each month on your own. When it’s included in your monthly mortgage payment, that saving happens automatically.

You’ll Have To Take Care Of Payments Yourself

Having an escrow account can be really convenient; all you have to do is make your full mortgage payment each month, and your lender or servicer takes care of putting the necessary funds into escrow and then paying out of that account when your bills come due.

Without an escrow account, you’ll need to take care of all this yourself, including keeping track of when your payments are due.

Your homeowners association (HOA) can put a lien on your home if you fail to pay your dues. In spite of this, HOA dues usually aren’t included in your monthly mortgage payment. To avoid issues with your HOA, be sure to set aside enough money in your budget each month to keep current on your HOA-related costs.

Before you ask your lender or servicer about an escrow waiver, be sure you’ll be able to handle budgeting ahead of time for tax and insurance costs on your own. Forgoing an escrow account can be beneficial for the flexibility it provides, but it can also be a risky choice if you don’t plan ahead. Be sure to weigh all the pros and cons and discuss with your lender whether you qualify.

Thinking about a refinance? You can get started online with Rocket Mortgage.