The Department of Veterans Affairs provides many services to past and present members of the United States military. Eligible service members can apply for a VA mortgage loan to finance the purchase of a home. The VA provides a guarantee to the mortgage lenders that the VA will back the amount of the loan. The VA has established rules and regulations regarding who is eligible for the loan, the amount it will guarantee and what type of properties are eligible. However, the remaining loan conditions, such as an escrow requirement, are determined by the lender.
VA Mortgage Loans
Using a VA mortgage loan makes it a little easier for veterans and service members to become homeowners compared to using a conventional mortgage. The VA guarantees the value of each VA loan as a measure of security in case the borrower defaults, but the VA itself is not a lender. Standard mortgage lenders and banks offer VA loans to eligible service members. These lenders can relax their approval criteria slightly because the VA has guaranteed the loan. Therefore, borrowers aren't required to make a down payment or pay private mortgage insurance.
An escrow account functions like a savings account to hold money for property taxes, homeowners insurance and other hazard insurance payments. If you have an escrow account, a portion of your monthly mortgage payment is set aside for taxes and insurance and moved to the account. The lender determines how much the additional payments will be by taking the total amount due for the year and dividing by 12. Often lenders like to collect a little extra in case a bill is higher than expected, but by law they can hold up to only 1/6 of the yearly total. When a tax or insurance payment is due, the lender pays it directly with the funds from the escrow account.
The mortgage lender wants to ensure that you're making these miscellaneous payments on time. Because the lender has an interest in your property until the loan is paid in full, a tax foreclosure or lapse in homeowner's coverage is not in its best interest. For borrowers with conventional mortgage loans, most lenders require escrow accounts if you don't have at least 20 percent for a down payment. The same is true for VA loans.
If you're required to keep an escrow account, you might be able to cancel it in the future. Unlike private mortgage insurance, there are no rules or regulations regarding the automatic cancellation of an escrow account -- the decision is completely up to your lender. Generally, wait until the loan balance falls below 80 percent of the original value before contacting the lender about terminating the account.