What Is an Escrow Waiver and How Do You Get One?
Gain financial control over your home. Learn what an escrow waiver is, how to qualify, manage responsibilities, and request one from your lender.
An escrow waiver is an agreement between a homeowner and their mortgage lender that removes the requirement for an escrow account. This means the homeowner directly handles payments for property taxes and homeowners insurance, rather than the lender managing them. This provides homeowners with more direct control over these financial obligations.
Understanding Escrow Waivers
An escrow account holds funds collected by a mortgage lender for property taxes and homeowner’s insurance premiums. When a homeowner waives escrow, they assume direct responsibility for these payments. The homeowner receives tax bills and insurance notices directly, ensuring they are paid on time and in full. The portion of the monthly mortgage payment previously allocated to escrow is no longer collected, requiring the homeowner to budget and disburse these funds independently.
Waiving escrow allows a homeowner to manage their funds until the actual due dates, potentially earning interest on those amounts in a separate savings account. While it offers greater financial control, it also requires diligent financial planning. The homeowner becomes solely accountable for avoiding missed payments and their associated penalties.
Qualifying for a Waiver
Lenders typically set specific criteria for homeowners to qualify for an escrow waiver. A strong loan-to-value (LTV) ratio is a common requirement, often meaning the homeowner has significant equity, such as an LTV of 80% or lower. This demonstrates a reduced risk for the lender.
A consistent history of on-time mortgage payments is also generally required, proving the homeowner’s reliability in meeting financial commitments. Lenders usually look for no delinquencies within the past 12 months. A strong credit score, often above a certain threshold like 720, further indicates financial responsibility.
Some lenders may also consider factors like the loan type, with conventional loans being more frequently eligible than government-backed loans like FHA or USDA loans, which often mandate escrow accounts. Additionally, some properties, such as those in flood zones, might not qualify due to increased insurance complexities. Lenders may also charge a one-time fee for waiving escrow, which can be a percentage of the loan principal or a slightly higher interest rate.
Managing Your Home Finances Without Escrow
Once an escrow waiver is in place, the homeowner assumes full responsibility for paying property taxes and homeowner’s insurance premiums. This requires disciplined financial planning to ensure sufficient funds are available when these large, periodic expenses come due. Homeowners should establish a dedicated savings account for these specific costs.
It is important to proactively track the due dates for both property taxes and insurance premiums, which are often annual or semi-annual payments. Setting up automatic transfers from a checking account into a dedicated savings account can help accumulate the necessary funds throughout the year. Homeowners should regularly review their tax assessments and insurance policies, as these amounts can change.
Failure to make timely payments can lead to severe consequences. Missed property tax payments can result in penalties, interest charges, and potentially a tax lien on the property. Lapsed homeowner’s insurance coverage due to non-payment can leave the property unprotected and may lead the lender to force-place more expensive insurance, known as lender-placed insurance, to protect their interest in the home.
Requesting an Escrow Waiver
To request an escrow waiver, homeowners should contact their mortgage lender’s customer service department. It is important to inquire about their specific policies and any required forms or documentation for the waiver request. Lenders often have a formal process that must be followed.
The homeowner may need to submit a written request, along with proof of current homeowners insurance and recent property tax bills for verification. The lender will then review the application, which can take several weeks for approval.