Can You Waive Escrows?
Like everything, it depends. You can waive escrows with approval. In follow-up posts, we’ll examine whether you should waive escrows, possible problems and other factors to consider. A number of scenarios cover whether you can waive escrows.
Scenario 1. You take out a mortgage and it is less than 80% LTV when you take it out.
If it’s a conventional loan (conforming to standards of Fannie Mae/Freddie Mac and subsequently owned by Fannie or Freddie). In this case, there is no requirement for PMI, which is an important distinction. The Fannie Mae selling/servicing guides note that the lender can charge up to .25% of the loan to waive escrows. Experience has shown that this fee usually falls in the range of perhaps $250 or so, but the lender can decide differently. The lender should agree to allow you to pay your property taxes, property insurance and other charges directly without having to escrow money with the lender as part of every monthly payment. However, the lender can also take into account a borrower’s ability to pay a large sum for property taxes and insurance at one time and deny the request, even if the loan is less than 80%. Regardless of the escrow waiver, the borrower will still be required to escrow for any flood insurance premiums! It is important to note that the lender/servicer is PROHIBITED from asking if you want to waive escrows or even offering. It must be a borrower request! However, if the borrower had a loan modification, late payments in the prior two years or other delinquency issues where an escrow waiver was revoked or other circumstances, the escrow waiver must be denied.
If it’s an FHA, VA or USDA loan, you cannot waive escrows. But, if you have an 80% or lower LTV, you should not be using an FHA loan anyway unless your credit is very marginal and there is no other option available anywhere!
If the loan will be owned by the lender (a bank or credit union made the loan but plans to hold the loan and not sell it to Fannie or Freddie) or any lender made the loan and it is sold to a private investment fund, the lender sets its own rules for escrow waivers. Many lenders may conform to the Fannie/Freddie standard, but there may be flexibility to allow waiver of all escrows.
Scenario 2. You take out a conventional mortgage with escrows and have been paying it promptly for a period of time. The market is hot and the value of your house has doubled. Say you took out a 90% loan for a $200,000 house, so you borrowed $180,000. You paid for two years and the amount you owe is not $175,000. But the house is now valued at $400,000. Your LTV is now $175/$400 or less than 44% LTV.
If the loan is owned by Fannie/Freddie, the lender is required to deny the escrow waiver request. The lender must deny your request if the mortgage balance is still equal to or greater than 80% of the ORIGINAL appraised amount. So if your appraised value was more than the purchase price, it would need to have appraised at $218,750 in the original appraisal. If so, you may be able to waive escrows for property taxes and property insurance but not for flood insurance or Private Mortgage Insurance (PMI).
If your loan is owned by original lender (bank or credit union) or was sold to a private investor, you may be able to waive escrows. Likely there is a fee involved, but the borrower can make this request and there is not a set policy to deny the request as there is with Fannie/Freddie.
Again with FHA, VA, USDA, escrows now and forever-no waivers allowed!
PMI is a separate issue. By law, the lender must stop collecting PMI when the LTV falls to 78% or less. The lender is only going to do this automatically based on the original loan amount and price/appraised value that was entered into the lender’s system. In this case, the value of the home rose to $400,000. The borrower can request that the lender stop collecting PMI. In order for the lender to agree (FNMA, Freddie or private bank or investment group), the borrower will need to obtain an appraisal demonstrating that the LTV is less than 80%. At that time, the lender should agree to eliminate collection, escrow and payment of PMI.
Again with FHA, VA and USDA, the borrower pays mortgage insurance premiums for a set period not less than 11 years. If the LTV was very high at the beginning, the mortgage insurance premium is there for life.
Side Note. If the home has appreciated like indicated, refinancing would provide the ability to waive escrows (except flood insurance). The cost of doing this outweighs any real benefit. But, some individuals are serial refinancers and want to take cash out of the home’s equity. If taking cash out of the home equity is the goal with a refinance, then it should not be an FHA/VA/USDA loan (unless your credit is very marginal and there is no other alternative). The refinance could include a request to waive escrows if the LTV stays below 80%.