Escrow Accounts: Post-Modification, What Happens To Your Money?

An escrow account is a savings account managed by a mortgage servicer that holds funds or property until all conditions of a sale are met. It is a way to ensure that both the buyer and the seller are protected. While not all homeowners have escrow accounts, they are generally required for government-backed loans or conventional mortgages with less than 20% equity. Escrow accounts are also used to pay property taxes and insurance premiums, including homeowners insurance, mortgage insurance, and flood insurance, if required. The money that goes into the escrow account comes from a portion of the borrower's monthly mortgage payment. Typically, an escrow account is maintained for the entire duration of the mortgage, and the payments are adjusted based on the underlying index and the lender's margin. In some cases, loan modifications can be made to remove the escrow requirement, but this may involve refinancing the mortgage.

Escrow requirements for different loan types

Escrow is an important part of the home-buying process, protecting both the buyer and the seller. It is a way to hold funds or property in a neutral third-party account until all conditions of the sale are met. An escrow account is sometimes required and sometimes it is not; it depends on the type of loan and the financial profile of the buyer.

Some conventional loans require a minimum down payment or equity and credit score to be met in order to waive the escrow requirement. Certain loan types, such as those from the Federal Housing Administration (FHA), require an escrow account to be maintained for the life of the mortgage. FHA loans are considered higher risk due to lower credit scores, smaller incomes, and fewer assets, so lenders want to ensure that the bills get paid. The escrow account holds money for property taxes, homeowner's insurance, and mortgage insurance premiums (MIPs).

For other loan types, such as USDA loans, an escrow account is often required no matter the down payment amount. If a loan has been modified to include escrow, then an escrow account must be maintained. Additionally, loans that require flood insurance may also require an escrow account to pay the premium.

In some cases, it may be possible to modify a loan agreement to remove the escrow requirement. This could involve refinancing the mortgage and meeting certain conditions, such as building enough equity and maintaining a good payment history.

Benefits of removing escrow

Removing an escrow account from a mortgage can provide several benefits to homeowners. Firstly, it can lower monthly mortgage payments. Without an escrow account, homeowners make payments for property taxes and insurance premiums directly to the relevant entities, rather than through the escrow account. This means that the monthly mortgage payment will not include the escrow portion, resulting in a reduced payment amount.

Secondly, removing escrow provides homeowners with greater control over their finances. With an escrow account, homeowners essentially provide the servicer with an interest-free loan, as most escrow accounts do not pay interest on the funds held. By removing escrow, homeowners can retain this money for a longer period, potentially earning additional interest on the funds. This increased control allows for more flexibility in managing finances, including the ability to pay other expenses in the short term.

Thirdly, removing escrow provides flexibility in choosing insurance carriers. Without an escrow account, homeowners can change insurance providers without coordinating with the escrow servicer, as long as the new provider meets the lender's requirements.

It is important to note that removing escrow comes with additional responsibilities. Homeowners become solely responsible for ensuring timely payments of property taxes and insurance premiums. Late or missed payments can result in penalties or fees, and a lapse in insurance coverage could lead to significant costs in the event of a natural disaster or other insured events. Therefore, removing escrow requires careful financial management and budgeting to avoid potential pitfalls.

Escrow waiver requirements

Escrow accounts are savings accounts that cover a borrower's estimated property taxes and homeowners insurance each year. They are set up by lenders or servicers to ensure that the borrower's property taxes and insurance premiums are paid.

• Property location: If the property is located in a flood zone, flood insurance must remain in escrow.
• Loan type: High-cost loans and higher-priced mortgages typically require an escrow account. Certain loan types, such as FHA and USDA loans, always require an escrow account and do not offer escrow waivers.
• Down payment: If you make a low down payment, your lender is more likely to require an escrow account.
• Home equity: If you have lower equity in your home, your lender may require an escrow account.
• State restrictions: Each state has its own restrictions on waiving escrow, so it is essential to consult a loan expert in your area.
• Loan-to-value ratio (LTV): To remove escrow from a conventional loan, an LTV ratio of 80% or lower is typically required.
• Loan age: If your mortgage is backed by Fannie Mae or the VA, the loan must be at least one year old. For Freddie Mac loans, there is no specific age requirement, but there should be no 30-day late payments in the last six months.
• Payment history: Most lenders require a good payment history with no late or missed mortgage payments.
• Escrow balance: You must have a positive escrow balance with no payments scheduled to come out of your escrow within the next 45 days.
• Refinancing: In some cases, you may need to refinance your mortgage to remove the escrow requirement. This involves added costs and fees, which may outweigh the benefits of removing escrow.

It is important to note that even if you qualify for an escrow waiver, you may still need to keep an escrow account for certain required payments, such as mortgage insurance. Additionally, lenders may charge a fee for escrow waivers, which is typically a small percentage of the loan amount or a slightly higher interest rate.

Escrow and loan modification

An escrow account is a savings account managed by a mortgage servicer. It is used to pay a borrower's property taxes and insurance premiums. It is a requirement for all Federal Housing Administration (FHA) loans and loans that require flood insurance. Typically, a portion of the borrower's mortgage payment goes into the account each month. This makes budgeting for large expenses easier.

Escrow payments can be waived or removed, but this depends on the type of loan and the state. For example, if the property is in a flood zone, flood insurance must remain in escrow. High-cost loans and higher-priced mortgages also require an escrow account. To remove an escrow account, a loan must be at least 12 months old, and the borrower must have had an escrow account for at least five years. Additionally, there can be no prior loan modifications, except for completed natural disaster-related workout plans.

Loan modifications can be made to remove the escrow requirement, but this could involve refinancing the mortgage. For example, a borrower who has built enough equity in their home and maintained a perfect payment history may be able to convince their lender to remove the escrow requirement.

A change in escrow payment is not the only reason mortgage payments could change. Other reasons include a change in the adjustable interest rate, the removal of private mortgage insurance (PMI), and the lender charging new or higher servicing fees.

Escrow and refinancing

Escrow is an essential part of the home-buying journey. It is a way to hold funds or property until all conditions of the sale are met, ensuring both buyer and seller are protected. An escrow account is created by mortgage lenders and servicers to hold money that will pay a borrower's property taxes and insurance premiums. Each month, a portion of the borrower's mortgage payment goes into the account for these costs, making budgeting for these big expenses easier.

When refinancing a mortgage, escrow funds collected at closing are known as "impound reserves", and their amount is determined by the lender. The escrow, or impound, account requires the borrower to send in payments for certain expenses each time they send mortgage payments to the lender. Escrow agents are in place to help refinancers and lenders track and disburse money according to the agreements made. The escrow process when refinancing a home should normally take a little over a week to finalize.

If you are refinancing with your current lender, your escrow account may remain intact. However, if you are refinancing with another lender, your current escrow account will be closed, and you should receive a check for the remaining balance within 30 days of paying off your former lender. The original escrow account remains with the old loan, and funds cannot be transferred to new loans. All the property taxes and insurance you have paid to that date, since the last payment was made, will be returned to you within 45 days via wire transfer or check.

It is important to note that refinancing will involve added costs and fees, which may erase any benefit of removing an escrow account from your mortgage. You may need to consider refinancing if you need to meet a specific loan-to-value ratio. For example, if your current LTV ratio is 85% but you need to reach 80% to be eligible, you may want to refinance.

Frequently asked questions