What is an escrow waiver? Definition, requirements, and pros and cons

An escrow account is an easy way homeowners can pay significant expenses such as property taxes and homeowners insurance as part of their monthly mortgage payment. An escrow waiver allows a homeowner to opt out of an escrow account. This can give the homeowner more financial flexibility, but also leaves them fully responsible for paying those bills on time and in full.

Understanding escrow accounts

Owning a home means you must pay property taxes, which fund local government services and schools. And, if you have a mortgage, your lender will require you to buy homeowners insurance to protect its investment in your home.

Due dates vary for property taxes, but they’re paid once or twice a year in most parts of the country. Homeowners insurance often is paid annually.

To help homeowners pay these essential bills, lenders typically set up an escrow account, also known as an impound account. The lender estimates your annual tax and insurance expenses and divides the total into monthly installments. This amount is added to the loan payment for principal and interest, and held in the escrow account.

When your tax or insurance bill is due, the lender will pay it on your behalf using the money in the escrow account. If the bill is more than expected, you’ll need to pay the difference. If it’s less than expected, you’ll get a refund.

Escrow accounts make paying these often-significant bills easier and more manageable for homeowners. Lenders make sure these bills are paid, protecting their investment against losses from unpaid taxes or damage to an uninsured home.

This isn’t to be confused with the escrow account set up during the home buying process to hold certain closing costs, like your earnest money deposit. This account is closed once the sale is complete.

What is an escrow waiver?

If you prefer to pay property taxes and homeowners insurance yourself, you can request an escrow waiver.

A waiver of escrow reduces your monthly mortgage payment because taxes and insurance are not included. However, this puts the onus on the borrower to manage and pay taxes and insurance premiums themselves.

Eligibility requirements for an escrow waiver

To be eligible for an escrow waiver, you need to meet your mortgage servicer’s guidelines. In many cases, these are a variation of the policies set for your loan type by mortgage investors such as Fannie Mae, Freddie Mac, Veterans Affairs, etc. But servicers also have their own rules.

We’ll go over the guidelines applicable to Rocket Mortgage^® clients. You’ll want to contact your lender to verify the policies that apply to your loan. There also are different guidelines depending on the state in which you reside.

Loan type

Fannie Mae and Freddie Mac allow escrow waivers for conforming conventional loans. The VA also offers escrow waivers.

The USDA strongly encourages  escrow accounts, but if the servicer is unable to do so, you may have to pay taxes and insurance on your own, whether you want to or not. Rocket Mortgage doesn’t offer USDA loans at this time.

The only loan option that doesn’t offer waivers of escrow under any circumstances is a Federal Housing Administration loan.

Loan-to-value ratio

For conventional loans from Fannie Mae or Freddie Mac, you must have at least 20% equity in your home to get a waiver of escrow. This means you must have a loan-to-value ratio of 80% or less. Your LTV ratio must be based on the original value of the home, excluding any value increases. The same original value standard applies to VA loans, but you need only 5% equity.

Credit score

Lenders may set credit score requirements for an escrow waiver. The only special one is that VA loans require a 620 median credit score. Everything else follows standard qualification guidelines for the investor.

On-time payment history

Because paying your property taxes and homeowners insurance premiums yourself rather than through an escrow account is required, mortgage lenders will review your payment history to make sure you pay your bills responsibly.

The requirements vary quite a bit by investor, but in general, you don’t want any mortgage payments that are 30 or more days late.

No recent delinquencies or defaults

In addition to actual payment delinquency, you can’t have failed a previous escrow waiver due to nonpayment of taxes or homeowners insurance in the past. Moreover, regardless of whether you’ve ever been delinquent, neither Fannie Mae nor VA loans are eligible for an escrow waiver if they have a tax payment due in the next 45 days.

Additional requirements

There’s usually a waiting period for removing escrow accounts from existing loans. It’s usually a year, but it can be up to 5 years for larger loans. If you’re unsure which time frame applies, talk to your servicer. You’ll also want a positive escrow balance.

Finally, you can’t get an escrow waiver if you have an existing loan modification unless it’s related to a natural disaster.

Pros and cons of an escrow waiver

Let’s look at the advantages and disadvantages of an escrow waiver.

How to request an escrow waiver

If you want to request an escrow waiver before taking out a loan, be clear with your lender and work with them to determine the specific requirements.

If you’re removing an escrow account, make sure your loan is at least a year old and you meet the requirements for being current on your payment. If you have a negative escrow balance, your servicer may allow you to replenish the funds to at least zero things out.

Finally, make sure you meet any restrictions in terms of equity, remembering to calculate only from the original value of your home when you purchased it.

The actual request process with your lender or servicer can be done in writing, via letter, email, chat, or over the phone.

FAQ

Here are answers to common questions about escrow waivers.

Can I request an escrow waiver after closing?

While servicers may have different policies, you generally can request removal of an escrow account after closing if you meet the conditions.

Are there fees associated with an escrow waiver?

There may be a flat escrow waiver fee or a percentage of the loan amount that’s charged in exchange for removing escrow. However, this also varies based on state law.

What happens if I miss a tax or insurance payment after waiving escrow?

You may have tax penalties assessed associated with missing a payment. If you miss an insurance premium payment, your policy may be canceled. Your servicer may purchase a policy that you need to pay for. They also may reinstate your escrow account.

How does an escrow waiver affect my monthly mortgage payment?

Waiving an escrow account removes the taxes and insurance portion of your monthly mortgage payment, which reduces your monthly payment. However, you’ll have to budget on your own for these expenses going forward. The cost doesn’t go away.

The bottom line: Escrow waivers can offer flexibility

Having an escrow waiver can give you more control over your monthly budget because taxes and insurance are no longer included in your mortgage payment. However, you still must budget for these items. Some may prefer having the money in their mortgage payments every month rather than paying the full cost all at once.

If you’re unsure about your own situation, you should always feel free to consult a financial advisor. If you feel confident in your escrow options and are ready to move forward in the mortgage process, apply online.