What Is An Escrow Waiver And Should You Get One?
Miranda Crace7-minute read
July 26, 2023
If you have a mortgage, you probably have an escrow account. Lenders and servicers typically require borrowers to get an escrow account – particularly if they make a low down payment or have little equity in their home.
But while an escrow account can make saving for your property taxes and homeowners insurance more convenient, it’s sometimes possible to get a loan without an escrow account or to remove an escrow account from your mortgage.
To do this, you’ll need to qualify for an escrow waiver – which we’ll look at in greater detail next.
What Is 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 are spread out across 12 equal payments and included in your monthly mortgage payment in addition to any principal and interest you pay on the mortgage itself. The amount you pay for property taxes and homeowners insurance will go into your escrow account, and the lender will use these funds to pay those bills 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 manage these payments on their own, they might see if an escrow waiver is an option. The escrow waiver allows homeowners to make these payments independent of an escrow account.
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How Do Escrow Waivers Work?
If you’re granted an escrow waiver, your property taxes and homeowners insurance won’t be included in your monthly payment. Instead you’ll be responsible for paying each of your bills in one lump sum, typically at the end of the year.
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 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.
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.
Why Do Lenders Prefer Escrow?
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?
It’s because 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.
Instead of putting their investment at risk, your lender will set up an escrow account for you and handle paying your property taxes on your behalf.
Homeowners insurance is escrowed for a similar reason. That is, 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, the lender protects their investment.
What Are The Requirements For An Escrow Waiver?
Whether you’ll qualify for an escrow waiver will depend on several factors, including:
- The loan-to-value ratio (LTV)
- The type of loan
- The type of property
- The lender’s rules regarding escrow waivers
- The state’s laws
- The details of your individual loan
Escrow Waiver Fee
If you’re able to get an escrow waiver, you may need to pay an escrow waiver fee, which equals a percentage of your loan amount.
Also, certain types of payments must be escrowed. If you have a conventional loan with private mortgage insurance (PMI), for example, you have to pay that through an escrow account. Similarly, borrowers who live in a flood zone and are required to have flood insurance may be required to have 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. 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 are mortgage loans that aren’t backed by a government agency. Most conventional loans are considered conforming, meaning they meet the guidelines to be sold to government-sponsored enterprises Fannie Mae and Freddie Mac.
This means that when you get a conventional loan, your ability to get an escrow waiver won’t necessarily just be determined by your lender’s rules and your state’s laws – it may also have to conform to the rules of these enterprises concerning escrow accounts.
To qualify for an escrow waiver on a conventional loan, you’ll generally 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 a good credit score. These are general guidelines, though; some lenders may be more or less stringent than others. In just a minute, we’ll walk through the specific requirements for escrow waivers on Rocket Mortgage® loans.
Federal Housing Administration (FHA) loans aren’t eligible for an escrow waiver.
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, but you’ll also no longer have to pay the FHA mortgage insurance premium, known as MIP. You’ll typically need to pay this kind of mortgage insurance throughout the life of the loan, regardless of how much equity you have in the home.
Veterans Affairs (VA) loans are mortgages backed by the Department of Veterans Affairs. Although the VA doesn’t have a rule requiring these loans to have escrow accounts, lenders typically do.
The escrow waiver requirements on VA loans are often similar to conventional loans. However, because one of the main benefits of a VA loan is getting a home with no required 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.
Consolidate debt with a cash-out refinance.
Your home equity could help you save money.
What Are Rocket Mortgage’s Requirements For An Escrow Waiver?
Whether you’re eligible for an escrow waiver will depend on a variety of factors. Below are some of our main requirements, but if you have questions about your specific situation, speak with your Home Loan Expert. Your state may also have laws around escrow waivers, so you may be subject to additional requirements.
To have your escrow account removed from your mortgage, 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
- A positive or zero escrow balance
- The loan to be at least 1 year old
What Are The Pros Of An Escrow Waiver?
An escrow waiver is often appealing to homeowners who want to have more control over their finances and payments. Let’s explore the benefits of waiving your escrow account.
Interest Earnings On Your Money
Although 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 place it in their own interest-earning account, where it can accrue cash until they have to pay their bills.
Lower Fees At Closing
Lenders want to ensure that the buyer has enough cash to cover the property taxes and homeowners insurance costs upfront. At closing, the lender will roll these fees in to create a savings cushion for those payments.
When the escrow is waived, those costs are no longer a part of the total cost of closing.
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.
What Are The Cons Of An Escrow Waiver?
For some homeowners, the stress of having to plan their property taxes and insurance payments in advance deters them from waiving escrow. Now for a closer look at the downsides of an escrow waiver.
Taxes And Insurance Can Be Expensive In One Lump Sum
If you want to forgo an escrow account, you’ll need to plan out your savings.
An annual homeowners insurance premium is around $1,200 on average, according to data from the National Association of Insurance Commissioners – but 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 2022 was $3,901, according to ATTOM Data Solutions.
Together, that’s around $5,000. One perk of escrow accounts is that you don’t have to commit to saving $400+ each month on your own. When included in your monthly mortgage payment, that savings happens automatically.
You’ll Be Responsible For Your Payments
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 the rest.
Without an escrow account, you’ll need to handle this yourself, and that means keeping track of when your payments are due.
The Bottom Line: Escrow Waivers Put The Ball In Your Court When Bills Are Due
Before you ask your lender or servicer about an escrow waiver, be sure you can handle budgeting ahead of time and on your own for property tax and insurance costs. Forgoing an escrow account can be beneficial because of 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.
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