In most cases, when your mortgage closes you will be required to establish an escrow account with your bank or mortgage company. Escrow is an account you pay into that is used to pay insurance bills and property taxes. Escrow agents are responsible for carrying out the instructions detailed in your mortgage agreement. If you are able to make a large enough down payment to lower your loan-to-value ratio, you may not be required to open and maintain an escrow account.
Escrow accounts are similar to savings accounts, but they are held by neutral parties called escrow agents. When your mortgage is funded, an amount is added to your monthly mortgage payment to build up a pool of money used to pay property taxes and your home insurance premiums. Additional expenses that may be covered out of your escrow account are any assessments stipulated by the local government.
According to Lending Tree, the Real Estate Settlement Procedures Act sets limits on the amount a lender can require you to put into your escrow account to that of one-sixth of the total amount of items paid from the account or approximately two months worth of payments. After your annual home insurance and property taxes have been paid, any excess of $50 or more will be returned to you.
The U.S. Department of Veterans Affairs and the U.S. Department of Housing and Urban Development do not require lenders to maintain escrow accounts, although many lenders have their own requirements for escrow accounts. The VA and HUD do require lenders to take actions that ensure insurance and property tax burdens are paid. Depending on the size of the down payment you are were able to make, the lender may determine the best way to ensure insurance, tax and special assessment requirements are met is to require you to maintain an escrow account.
Escrow accounts are mandatory for purchase or refinance loans where the loan amount is 80.01 percent or more of the property value, according to Crestline Funding. In California, escrow accounts are required for home refinance and home purchase loans for which the loan-to-value rate is 90 percent or more. To avoid the requirement for an escrow account you must make sufficient down payment on your mortgage to get your loan-to-value ratio below the requirements of your lender and state regulations. Lenders may charge a one-time fee for setting up your mortgage without an escrow account.
A financial institution may voluntarily waive the escrow account requirement and leave it up the consumer to save for the property tax and insurance, Wisconsin Department of Financial Institutions explains. As part of the waiver agreement, the financial institution may require you to establish a savings account that is pledged to the payment of taxes and insurance. The best way to identify your options is to ask your bank or mortgage representative if an escrow account can be avoided.
- Lendingtree: Escrow: What It Is and How It Works
- Lendingtree: Understanding Your Escrow Account
- US Department of Veterans Affairs: Post-Loan Frequently Asked Questions
- HUD.GOV: FAQs About Escrow Accounts for Consumers.
- Crestline Funding: Frequently Asked Questions
- State of Wisconsin Department of Financial Institutions: Commonly Asked Questions on Escrow Accounts
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