What is an Escrow Waiver and Is It a Good Idea?
Waiving escrows means you opt out of having property taxes and insurance collected monthly with your mortgage payment.
Instead, you are responsible for paying these costs on your own when they become due.
This strategy has its advantages, but not everyone is eligible. It’s typically reserved for borrowers with large down payments or substantial equity in the home who can make these large lump-sum payments. Before deciding whether to waive escrows, ensure it’s an option for you.
The term “escrow waiver” doesn’t refer to the escrow company, which is required in all mortgage transactions.
Escrow Waiver Requirements
Most mortgage applicants don’t qualify for an escrow waiver, especially new buyers. You have to be a very strong candidate to be approved for one. Following are general guidelines.
Conventional loans
Conventional loan rule-makers Fannie Mae and Freddie Mac don’t set hard-and-fast rules about who qualifies for an escrow waiver. It leaves it up to lenders to create policies that “provide that the waiver not be based solely on the LTV ratio of a loan, but also on whether the borrower has the financial ability to handle the lump sum payments of taxes, insurance, and other items.” You may see rule variations from lender to lender, but most will require:
20% down or 20% equity if a refinance
No mortgage late payments in the last 1-2 years
No late payments on property taxes and homeowner’s insurance
Excellent credit
Adequate funds in reserve after closing
FHA Loans
FHA loans do not permit escrow waivers under any circumstance.
VA Loans
Some lenders will approve an escrow waiver on a VA loan with 10% down, great credit, and funds in reserve after closing. You might find more lenient lenders. The VA does not require escrows but leaves the decision up to lenders.
USDA Loans
USDA home loans require tax and insurance escrows with no option to waive them.
Escrow Waiver Advantages
If waiving escrows is available to you, here are reasons you might take advantage of this option.
Lower closing costs: Because the lender does not have to collect three to nine months of taxes and 15 months of homeowner’s insurance, you will have to bring less money to the closing table.
Lower monthly payment: Your monthly mortgage payment will be lower, but waiving escrows doesn’t reduce your costs. You pay taxes directly to the county and premiums to the insurance company when they become due.
Earn interest: Some people keep property taxes and homeowner’s insurance in a high-interest savings account until payment is due. That way they earn interest on this money instead of their mortgage servicer.
More flexibility: Your credit will take a hit if you don’t pay your principal, interest, and 1/12 of your yearly homeowner’s insurance and property tax bill each month. Waiving escrows gives you the flexibility to pay principal and interest only in lean months.
Disadvantages of Waiving Escrows
Lump-sum payments: It could be tempting to spend the money you have saved to pay taxes and insurance. Make sure you have adequate funds to keep up on these costs.
Planning: If you’re a disorganized person, don’t waive escrows. It’s your responsibility to know property tax and homeowner’s insurance due dates and amounts. You will need to remember to make payments three to five times per year to the county and insurer.
Cost: As explained below, most lender charge extra fees to waive escrows.
Paying More for an Escrow Waiver
Because waiving escrows is risky for the lender, expect to pay a higher rate or more lender fees when selecting this option.
Waiving escrows usually costs around 0.25% of the loan amount. For a $300,000 loan, you might pay $750 extra in fees.
This cost may offset any interest income or other advantages from this strategy.
Does Waiving Escrows Help My Debt-to-Income (DTI) Ratio?
No. The lender will calculate your DTI using taxes and insurance whether you open an escrow account or not. If you have a high DTI already, an escrow waiver likely won’t be an option for you.
Can I Remove Escrows From My Current Mortgage?
Some mortgage servicers will allow you to remove escrows from your existing mortgage with 20% equity, no recent late payments, and at least 30-60 days until the next tax or insurance payment.
Is an Escrow Waiver Right for You?
Although they come with risks, escrow waivers suit some mortgage borrowers nicely.
Check with a reputable lender to see if you are eligible for this loan feature.
