Escrow waiver: What is it, and do you need one?

When you take out a mortgage, your lender will likely require an escrow account. Escrow accounts are bank accounts reserved for part of your monthly mortgage payments, like insurance and other relevant expenses. Escrow accounts are meant to protect both the borrower and the lender by helping ensure payments are made on time. But what happens if you don’t want a separate account for your part of your mortgage payments?

What is an escrow waiver?

If you are a mortgage holder and are interested in managing your property tax and insurance payments on your own without the structure of an escrow account, you may request an escrow waiver. Escrow waivers are when a lender “waives” or forgoes the requirement of establishing an escrow account.

An escrow waiver means the borrower will be making direct payments to relevant parties rather than the lender collecting money and making the payments on the borrower’s behalf (insurance payments will be made directly to your insurer, taxes will be paid directly to tax authorities and so-on). While the borrower has more control over payments, consequently, they’re increasing personal responsibility.

How do you remove escrow from a mortgage?

If you’re interested in removing escrow from a mortgage, you may be wondering how to move forward. Typically, there is a formal request process with your lender. Consider contacting a home lending advisor to ask about removing escrow.

First, they’ll be able to confirm whether your loan product itself is eligible. If you find your mortgage eligible for a potential escrow waiver, your home lending advisor will then likely provide you with details on individual criteria for the escrow waiver and how you may move forward with the request.

It’s important to note that not all borrowers are eligible for an escrow waiver, and eligibility criteria may vary by lender and location. Lenders may have specific guidelines and requirements regarding a borrower’s creditworthiness and the loan program itself.

Escrow waiver requirements

Can you waive escrow on a VA loan?

While the Department of Veterans Affairs may not have an official rule book on escrow waivers, your lender might. If you have a VA loan, it’s best practice to ask your lender whether you can waive escrow on your loan.

Can you waive escrow on an FHA loan?

Federal Housing Administration (FHA) loans are not eligible for escrow waivers. FHA borrowers are required to hold an escrow account throughout the life of their mortgage.

Can escrow be waived on a conventional loan?

You may be able to get an escrow waiver on your conventional loan depending on your loan-to-value ratio, your lender’s policies and other criteria, such as your history of on-time payments.

Escrow waiver fee

Escrow waivers typically come with a fee and are expressed as a percentage of your mortgage principal. The exact percentage will depend on your loan type and your lender.

Pros and cons of escrow waivers

Like most decisions, there are pros and cons to either path taken. Let's look at the pros:

Pros of an escrow waiver

Overall, borrowers often opt for escrow waivers to exercise more control over their personal finances.

• Lower closing costs: When you close on your mortgage, part of your closing costs go toward your escrow account. In the absence of an escrow account, you may lower your closing costs.
• More control over your assets: An escrow account holds your money for other expenses. Without an escrow account, you may increase your liquidity, flexibility and overall control of your financial assets for other debts in the short term.
• Potential savings: By freeing up the cash that would be in your escrow account, you may provide yourself with the opportunity to put your money in higher-yield savings or investment accounts.
• Avoid lender markup: To ensure your debts are covered, lenders may mark up the amount of money required in your escrow account. If you opt for an escrow waiver, you may be avoiding this.

Cons of an escrow waiver

Overall, borrowers may decide against an escrow waiver because of the increased financial responsibility as it pertains to taxes, insurance and other mortgage-related payments. Some cons include:

• Increased responsibility: As noted, managing property taxes, insurance premiums and other mortgage payments on your own may be more complex and time-consuming than managing just one mortgage payment.
• Risk of missed payments: Without the automation of an escrow account, you may be risking missed payments that could potentially result in additional fees.
• Escrow fees: While waiving your escrow account could save you money during closing, it doesn’t exempt you from paying an additional fee.
• Limited lender flexibility: Not all lenders and mortgage products allow for escrow waivers. If your lender or mortgage product allows for an escrow fee, this does not ensure your approval.

In summary

Escrow waivers help borrowers forgo the need for an escrow account. If you’re interested in having more control over your payments and potentially freeing up cash in the short term, an escrow waiver could be an option. Do note that they may not always be applicable and often come with a fee. If you’re looking to learn more about escrow and escrow waivers, consider reaching out to a home lending advisor to explore your options.

Escrow wavier FAQs

1. Can I waive escrow after closing?

If you’re interested in waiving escrow, it is best practice to inquire about this prior to your closing.

2. Is it good to waive escrow from mortgage?

The term “good” is relevant per borrower and mortgage product. As mentioned above, there are pros and cons to waiving your escrow. If you’re looking for lower closing costs and more control over financial assets, then an escrow waiver may be something worth considering.

3. Why do banks charge an escrow waiver fee?

Banks may charge an escrow waiver fee for a few reasons, including risk mitigation, administrative costs and associated overhead costs.

4. What kind of loans require an escrow account?

FHA loans require an escrow account. However, the type of loan that requires an escrow account may depend on your personal eligibility, your lender and where you live.