In case you haven’t noticed, mortgage lenders are all about requirements.  Mortgage lenders are all about the borrower meeting their criteria.  Why shouldn’t they be?  For the next 15 to 30 years, they have a vested interest in your home.  The mortgage lender is going to do everything it can to protect their investment.  Now, before telling you how you could potentally waive setting up an escrow account, let’s explain why lenders prefer and enforce escrow accounts in the first place.

Most mortgage lenders require that their borrowers escrow their taxes and homeowners’ insurance.  The is done to ensure that all required property taxes, homeowners’ insurance, as well as any other type of applicable insurance are paid in full.  When you look at the pecking order of liens, in most situations, taxes take priority over mortgages.  If a homeowner falls behind on their taxes, the local tax authority can, and usually does force a tax sale due to delinquency.  When this happens, the lender loses out completely on their investment.  To prevent that from happening, mortgage lenders will typically pay the taxes with their own money.  Now, as the homeowner, you owe your mortgage lender that dollar amount.  Failure to pay could result in foreclosure.

Mortgage lenders will escrow homeowners’ insurance for basically the same reason.  Even though your local municipality will not sell your home if it catches fire, your mortgage lender still stands to lose their investment if the damaged property cannot be restored.  A home that is damaged in a fire or flood will lose value.  By maintaining homeowners’ insurance and keeping the premiums paid, the mortgage lender is protecting their investment.

When you have an escrow account, your annual payments are spread out equally over 12 months.  This amount is added to your monthly principal and interest (P & I) mortgage payment.  You are now paying principal, interest, taxes, and insurance (PITI) every month.  Once these payments are made, your mortgage company will take the portion for escrow and move it to your designated escrow account.  This money will be saved for when tax bills and/or homeowners’ insurance are due to be paid, at which time the mortgage company will pay them out of the escrow account on their borrower’s behalf.

Escrow accounts can prove beneficial for both sides.  As we mentioned, the lender is protecting their investment by making sure that all taxes and insurance are paid in full.  By the same token, the borrower doesn’t have to worry about coming up with a huge lump sum every year when the tax collector comes knocking, or when the insurance company is hounding you with renewal notices stating that you have one week to make your payment or risk losing your coverage.

Those who would rather not escrow need to obtain an Escrow Waiver from their mortgage company.  Take note that you may have to pay an escrow waiver fee.  This is typically dependent on what state you reside in, and the type of loan you are looking to obtain.  Escrow waiver fees are equal to a small percentage of the loan amount.  So, needing an escrow waiver, possibly having to pay a fee for it, why wouldn’t you just escrow?  Well, here are a few reasons why borrowers may not want to escrow:

• Hold on to their money each month and keep it in an interest-earning account.
• Lower monthly mortgage payment when paying principal and interest only.

Both are true statements.  Both can prove to be helpful.  However, both can also prove to be detrimental.  If you are not able to save the needed funds for when the tax man comes knocking, the mortgage lender will most likely pick up the tab.  When this happens, the escrow waiver that was granted will most likely be revoked for the life of the loan.

It is also important to note that there are certain payments that must be paid into an escrow account.  For example, if you take out a conventional mortgage and put down less than 20%, your mortgage is subject to private mortgage insurance (PMI) which must be paid into an escrow account.  The same is true if you live in a flood zone.  Different stages of flood zones can require a specific flood insurance policy in addition to your homeowners’ insurance policy.  In some cases, the mortgage lender may require you to pay your flood insurance into an escrow account.

Now, before we get ahead of ourselves, let’s review what requirements must be met for us to obtain an escrow waiver.  Remember these requirements vary by both mortgage lender and state.

Conventional loans, also known as conforming loans, while not backed by any government programs, do meet the guidelines to be sold to the government-sponsored Fannie Mae and Freddie Mac.

To obtain an escrow waiver when applying for a conventional loan, you will need to not only meet the requirements of the lender themselves, but you’ll also need to meet the specs for Fannie Mae and/or Freddie Mac.

The basic requirements for an escrow waiver on a conventional loan are:

• Loan-To-Value (LTV) must be below 80%. This means that you must have more than 20% equity in your home.  LTV is the percentage of debt owed against the property’s market value.  For example, if your home is worth (for the sake of simple math here) $500,000 – your mortgage balance cannot exceed $395,000 (79% of the property’s value).
• No recent mortgage delinquencies
• No loan modifications
• No previous escrow waiver defaults

FHA Loans are not eligible for an escrow waiver because they are backed by the Federal Housing Administration.  FHA Loans require borrowers to have an escrow account for the life of the loan.

Now when the home reaches a level of 20% equity, borrowers have the option of refinancing into a conventional loan product.  This will accomplish a couple of things.  First off, it removes the FHA Mortgage Insurance Premium (MIP) from the monthly payment.  Second, if refinancing into a conventional loan, borrowers will then have the option of looking to obtain an escrow waiver.

VA Loans are backed by the Department of Veterans Affairs.  Now, even though the VA doesn’t have any specific rules requiring escrow accounts, the lenders do.

Lenders who do allow escrow waivers have requirements that are like conventional loan requirements.  There is one small detail with regards to VA loans.  The main benefit of VA loans is that borrowers do not need a down payment.  So, many borrowers with VA loans do not qualify for an escrow waiver simply because there is not enough equity in the home.  Remember, as is the case with conventional loan requirements, there needs to be over 20% equity in the home to qualify for an escrow waiver.

Most Non-QM Loans (formerly known as sub-prime loans) do not allow escrow waivers.

Is escrow the right way to go?  Is waiving escrow going to be beneficial?  Will there be enough in the monthly savings to justify waiving escrow?  Let’s take a look at the pros and cons of waiving escrow.  Perhaps this will help make the decision a bit easier.

As mentioned earlier, getting an escrow waiver can save you money on your monthly payments, as you will only be paying on the principal and interest on the loan.  It also gives you the ability to place the money you would be putting into escrow, into an interest-earning account of your own.  You also have control of your property tax and insurance payments.  This could be particularly important if you have an income that is not consistent on a month-to-month basis, such as commission paid roles.  In short, it gives borrowers flexibility.

You are responsible to have the lump sum of cash needed for when these bills come due.  An average homeowner’s insurance premium runs around $1,200 give or take.  Property tax bills average out to be around $4,100 per year.  Put those two together and you’re looking at needing $5,300 basically all at once.  That equates to you needing to set aside approximately $442 every month.  You’ll also have to be sure to take care of making the payments when they are due.

In the end, waiving escrow gives you, the borrower, complete control.  You’ll want to make sure that you’re about to budget the necessary amount each month to assure yourself that the taxes and insurance can be paid when they are due.  As we’ve outlined, waiving escrows can be beneficial, yet risky at the same time.  Be sure to take all the pros and cons into consideration.  Be sure to ask questions.

If you’re looking to purchase or refinance, and you’re property is in Pennsylvania, simply fill out one of our Purchase or Refinance forms, and one of our professional loan officers will get in touch with you.