What Is An Escrow Waiver? Requirements, Fees, Pros And Cons

If you have a mortgage, you may 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 lower 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 waive an escrow account from your mortgage. To do this, you’ll need to qualify for an escrow waiver.

What Is An Escrow Waiver?

If you’re granted an escrow waiver, your property taxes and homeowners insurance won’t be included in your monthly mortgage payments. Instead, you’ll be responsible for paying each of your bills in one lump sum, typically at the end of the year. This is the alternative to using an escrow account, where your lender will set the amount you’ll pay for taxes and insurance aside and pay the bills on your behalf.

Waiving an escrow account can be useful or risky depending on your plans. 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 an unpleasant surprise 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 risking their investment, your lender will set up an escrow account for you and pay your property taxes on your behalf.

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

What Are The Requirements For A Waiver Of Escrow?

If your lender offers escrow waivers, you need to meet certain guidelines.

Basic Requirements

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.

Payment Types

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.

Escrow Waiver Requirements By Loan Type

Escrow waiver requirements depend on whether you're asking the escrow account be waived prior to getting a loan or having it removed after the fact. States also have their own restrictions. Before we get into issues specific to loan type, let's go over some general rules, starting with restrictions on waving escrow prior to giving a mortgage:

• If the property is in a flood zone, flood insurance has to remain in escrow.
• High-cost loans and higher-priced mortgages require an escrow account.

Looking to remove an existing escrow account? Here's what applies to every loan type:

• Mortgages have to be at least 12 months old.
• If you have a higher-priced mortgage loan, you have to have had an escrow account for at least 5 years.
• With the exception of completed natural disaster-related workout plans, you can't have had any prior loan modifications.

Conventional Loans

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. This means you have to meet minimum down payment or equity requirements and meet eligibility to waive escrow when you initially get your loan.

Requirements for the removal of the escrow account after the fact depend on whether the investor in your mortgage is Fannie Mae or Freddie Mac. Let's start with Fannie Mae:

• No defaults while on a prior escrow waiver.
• No force-priced homeowners insurance or property taxes in the past.
• Escrow balance must be $0 or greater.
• You must have 20% or more equity in your home based on its value when you originally got your mortgage.
• No payments may be scheduled out of your current escrow account within 45 days of your request.
• You can't have had a payment that was 30 or more days late in the last year or 60 or more days late in the last 2 years.

Freddie Mac's requirements are a little more straightforward. One of the following must be true:

• You've had no payments that were 30 or more days late in the last 6 months.
• You have 20% equity in your home based on your original amortization schedule when you took out your loan.

FHA 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 home equity you have.

VA Loans

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

With Rocket Mortgage, you don't need a down payment to qualifiy to remove escrow when you originally get the loan. You will need a FICO^® Score of 620 or better. If you're looking to remove an existing escrow account, the following rules apply:

• You need at least 5% equity based on the value of your home when you closed your loan originally.
• You can't have defaulted on a past escrow waiver.
• Your servicer must not have ever force placed homeowners insurance or taxes.
• Your escrow balance must be positive or $0.
• No payments must be scheduled from your escrow account for at least the next 45 days.
• In the last year, no payments can be 30 or more days late.

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. Here are the benefits of waiving your escrow account.

You Can Earn Interest 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 grow until they have to pay their bills.

You’ll Have 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 cash needed to close.

You’ll Have Flexibility And Control

If you prefer to be in control of your property tax and insurance payments, or if you have a fluctuating income, 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. Take 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 $2,377 on average, according to the National Association of REALTORS^® – 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 $3,237, according to the U.S. Census Bureau.

Together, that’s $5,614. One perk of escrow accounts is that you don’t have to commit to saving hundreds of dollars each month on your own. When included in your monthly mortgage payment, those savings happen 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 Provide Flexibility

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 risky 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 buying a home? Establish your home buying budget with initial mortgage approval. Get started online with Rocket Mortgage.