Escrow Waiver Mortgage: Requirements, Fees and Whether to Waive

An escrow waiver lets you pay your property taxes and homeowners insurance yourself instead of having your lender collect them with each monthly payment. Lenders grant waivers case by case. Most want a conventional loan, a large down payment (often 20% or more) and strong credit. Many charge a fee. Some loans, such as FHA loans and higher-priced mortgages, rule a waiver out.

This guide covers who qualifies, what a waiver can cost, which loan types allow it and how to decide. It also shows how to plan the cash you will need if you take over those bills.

TL;DR

• An escrow waiver means you pay property taxes and homeowners insurance directly. Your monthly mortgage payment drops, but you owe large lump sums on your own schedule.
• Waivers are most common on conventional loans with at least 20% down. Lender policies differ, so ask early and ask in writing.
• Federal rules require escrow for at least the first five years on higher-priced mortgage loans, and FHA loans generally require it too.
• Some lenders charge a fee to waive escrow. Compare the fee on your Loan Estimate against what you expect to gain.
• Waiving works best if you have a cash cushion and a system for paying the bills on time. A missed tax bill can lead to penalties and a tax lien.

Table of Contents

• What an escrow account does, and what a waiver changes
• Who qualifies for an escrow waiver
• Loans where escrow is required
• What an escrow waiver can cost
• Should you waive escrow? A decision checklist
• Our perspective
• How to ask for a waiver, step by step
• Waiving escrow later
• Talk to us before you choose a loan
• FAQ
• Sources

What an escrow account does, and what a waiver changes

With an escrow account, your lender adds a portion of your annual property tax and insurance bills to each mortgage payment. It holds that money and pays the bills when they come due. Your payment is principal, interest, and one-twelfth of those yearly costs.

With a waiver, your payment covers principal and interest only. You pay the county tax bill and the insurance premium yourself. The lender still cares whether those bills get paid, because unpaid taxes can become a lien that outranks the mortgage. Fannie Mae’s servicing rules say the servicer must monitor the status of escrow and related charges even when a loan has no escrow account, so a waiver does not take the lender out of the picture.

A simple example

Suppose your annual property tax is $4,800 and your insurance is $1,800. With escrow, about $550 a month goes into the account on top of principal and interest. With a waiver, your monthly payment is $550 lower, but you must have $4,800 ready when the tax bills arrive and $1,800 when the policy renews. The money is the same. What changes is who holds it, and who carries the risk if a payment is missed.

Who qualifies for an escrow waiver

There is no single national standard. Each lender sets its own policy within the rules of the investor that buys the loan and within federal law. These are the criteria that come up most often.

Down payment and loan-to-value

The 20% line matters because lenders can generally require escrow when you borrow more than 80% of the property’s value. The Georgia Attorney General’s consumer division explains that for conventional loans, escrow is generally required unless the lender waives it in writing, and that a lender might agree to a waiver when your down payment is at least 20%. Some lenders will consider less than 20% down, but that is their choice, not a right.

Credit and financial strength

Investors are cautious about waivers for borrowers who might struggle with lump sums. Fannie Mae’s servicing guide advises lenders not to solicit escrow waivers from first-time homebuyers or borrowers with blemished credit. It also says the servicer can deny a waiver request if the borrower has received a prior mortgage loan modification. If you are buying your first home, expect closer scrutiny of your ability to handle lump-sum payments. That does not mean no. It means you should show your reserves clearly.

Paperwork

A waiver is a written agreement with your lender, so get it on paper. Ask the lender to confirm the terms in your loan documents, including any fee and any conditions that would let the lender cancel the waiver later, such as a missed tax payment.

Loans where escrow is required

Higher-priced mortgage loans

Federal rules set a floor. The Consumer Financial Protection Bureau’s escrow rule, which took effect June 1, 2013, requires certain lenders to collect monthly escrow payments for at least the first five years on certain mortgages. These are higher-priced mortgage loans on a first lien for a principal dwelling. The rule does not apply to all loans, and it applies whatever a lender’s usual waiver policy is. The CFPB announced the rules in its January 2013 release.

If your rate is high enough to make the loan higher-priced, you cannot waive escrow during that period. A lower rate, a larger down payment or stronger credit can keep a loan out of that category, which is one more reason to compare offers across lenders.

FHA loans

FHA loans generally require an escrow account for taxes and insurance. If you are weighing an FHA loan because of a smaller down payment, plan on escrow as part of the deal. You can read how the program works on our FHA loans page.

VA, USDA and other programs

VA loans do not carry a blanket escrow requirement the way FHA loans do, but individual lenders often set their own. USDA loans typically use escrow as well. Always ask the lender what its policy is for your specific loan program before you assume a waiver is possible.

Federal limits on escrow accounts

If you keep escrow, federal rules limit how much a servicer can hold. Regulation X, section 1024.17, sets the limits for escrow accounts on federally related mortgage loans, using calculations based on monthly payments and disbursements. Your servicer must send an annual escrow statement, and a shortage or surplus is adjusted from there.

What an escrow waiver can cost

There are three kinds of cost to consider.

1. A waiver fee. Some lenders charge a one-time fee. Others build the cost into your interest rate, and some waive escrow at no charge. The Georgia consumer page above addresses whether a lender can charge for waiving escrow, and it is worth reading. Look for the fee or any rate adjustment on your Loan Estimate, and ask the lender to explain every line.
2. Lost convenience. You track due dates, shop insurance renewals and handle bills that may arrive at different times of the year.
3. Risk of a missed payment. Mortgage industry analysts note that a waiver shifts the administrative burden and risk from the lender to you. Miss a property tax bill and you face late fees, penalties and possibly a tax lien. An escrow shortage is a smaller problem than that.

On the other side of the ledger, the benefits are lower monthly payments, control over your cash, and the chance to keep the money in your own savings account until the bills are due. Whether that earns enough to cover a fee depends on the fee, the interest you actually earn and your discipline in setting the money aside.

Should you waive escrow? A decision checklist

A waiver tends to suit you if most of these are true:

• You have at least 20% equity and a cushion of cash beyond your down payment and closing costs.
• You have steady income and a record of paying bills on time.
• Your tax and insurance bills are predictable, and you know the due dates.
• You will move the money into a separate savings account every month.
• The waiver fee, if any, is small compared with what you expect to gain.

Escrow may be the better choice if any of these apply:

• This is your first home and you have not budgeted for annual or semiannual bills.
• Your income varies from month to month.
• Your insurance is likely to rise, for example in a region with rising premiums. If you are buying in a coastal area, this guide to coastal Florida property insurance shows how much insurance planning can matter.
• You value one simple payment more than a slightly lower one.

Plan the cash flow before you decide

Before you ask for a waiver, add up what you will owe in a year. A mortgage calculator with taxes and insurance lets you see the payment with and without those costs, so you know how much to set aside each month. Then set up a dedicated account and an automatic transfer on the same day your paycheck lands. If you cannot do that comfortably, escrow is doing a useful job for you.

Our perspective

We work with first-time buyers, homeowners who are refinancing and seniors, and escrow comes up in nearly every conversation about monthly payment. Our view is that a waiver is a tool, not a goal. A lower payment looks attractive, but it does not reduce what you owe. It moves the due date of your tax and insurance bills from the lender’s schedule to yours.

We ask clients three questions. Can you cover a full year of taxes and insurance from savings if you had to? Will you reliably set money aside each month? And is the waiver fee, if there is one, worth what you expect to save? If the answer to all three is yes, a waiver can make sense, particularly on a conventional loan with a solid down payment. If you are unsure about any of them, keeping escrow protects you.

Because we compare lenders for you, we can check each lender’s waiver policy and fee before you commit, rather than after you have chosen a loan. That matters because policies differ and are easy to miss. Our application is fully online, and we aim to fund loans in under 21 days, so you can raise escrow in your first consultation and still keep your timeline.

— David Mordue

How to ask for a waiver, step by step

1. Decide before you apply. Escrow terms are easier to arrange when you choose your lender and loan program than at the closing table.
2. Ask each lender for its policy. Request the minimum down payment, credit score, fee and any conditions for waiving escrow on your loan type.
3. Compare the Loan Estimates. Look at the interest rate, points and any waiver fee together, not one at a time.
4. Get the waiver in writing. The Georgia consumer guidance notes that a waiver comes in writing from the lender. Keep a copy.
5. Set up your reserve account. Fund it before your first tax or insurance bill is due.
6. Calendar every due date. Property tax schedules vary by county, so check your local tax collector’s website for yours.

Waiving escrow later

If you did not get a waiver at closing, you can ask your servicer later. Servicers apply their own rules and investor rules. Fannie Mae’s servicing guide lists conditions under which a servicer may deny a request, including a prior loan modification. A refinance is another route. Because a refinance is a new loan, the lender sets new escrow terms, and you can compare waiver policies as part of choosing it. Our refinance calculator can help you see how a new rate changes your payment before you decide.

The reverse also happens. A lender may cancel a waiver if you miss tax or insurance payments, and then require you to start an escrow account. That is another reason to treat the tax and insurance deadlines as seriously as your mortgage due date.

Talk to us before you choose a loan

If you are buying a home or refinancing and want to know how escrow would work on your loan, we can walk you through the options. We compare rates across lenders, check each lender’s escrow policy and take applications fully online. You can start on our rates page or reach us from the David Mordue home page to begin a home purchase or refinance. See If You Qualify, and get clear answers before you commit to a lender.

If you are comparing loan structures, you may also want to look at our 30-year fixed-rate and 15-year fixed-rate pages, since the term you pick changes the size of the payment that escrow sits on top of.

FAQ

Should you waive escrow on a mortgage?

It depends on your cash reserves and discipline. A waiver lowers the monthly payment but leaves you responsible for large tax and insurance bills. If you have at least 20% equity, savings to cover a year of those bills and a reliable system for setting money aside, it can work. If not, escrow is the safer choice.

How do you qualify for an escrow waiver?

Lenders usually look for a conventional loan, a loan-to-value ratio of 80% or lower, good credit and enough reserves. Policies vary by lender and investor, so ask for yours in writing. First-time buyers and borrowers with credit problems can expect closer review.

Does FHA allow you to waive escrow?

Generally no. FHA loans generally require an escrow account for taxes and insurance. If you want the option to pay those bills yourself, a conventional loan is usually where waivers are available, subject to the lender’s rules.

Is there a fee to waive escrow?

Sometimes. Some lenders charge a one-time fee, some adjust the rate and others charge nothing. The amount varies, so check the fee on your Loan Estimate and ask the lender to explain how it is calculated before you agree.

Sources

• Administering an Escrow Account and Paying Expenses, Fannie Mae
• Can a mortgage lender charge a fee for waiving escrow? Georgia Attorney General’s Consumer Protection Division
• What the January 2013 escrow requirements mean for consumers, CFPB
• CFPB Issues Rules to Strengthen Protections for High-Cost Mortgages
• 12 CFR 1024.17, Escrow accounts, CFPB
• What is an Escrow Waiver and Is It a Good Idea?