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When you get a mortgage, your lender will usually set up what’s called an escrow account. They use this to stow away a portion of your monthly payments, eventually using those funds to pay your property taxes and homeowners insurance premiums when they come due. If your home loan requires mortgage insurance, these funds are usually held in an escrow account.
But what if you’d rather manage the savings and payments on your own instead of going through an escrow account? Depending on your situation, this could be an option. You’ll just need an escrow waiver from your mortgage lender or loan servicer.
Here’s what you need to know about escrow waivers, why you might want (or not want) one, and how to get the waiver.
Read more: How to get a mortgage, step by step
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What an escrow waiver is
An escrow waiver allows you to forgo an escrow account , which is typically required when you get a mortgage. Essentially, it means your loan servicer won’t be collecting money for your homeowners insurance premiums or taxes along with your monthly payment, nor will it be taking care of the payment process for those bills on your behalf as it would with escrowed loans.
With an escrow waiver in place, it becomes your responsibility to pay the tax and insurance companies. You’ll need to ensure you have the cash to cover your property taxes and insurance premiums and make those payments when they eventually come due.
Basically, by cutting out the middleman (your loan servicer) in paying for taxes and insurance, these bills will no longer make up your monthly mortgage payment. You’ll pay for them separately.
Pros and cons of getting an escrow waiver
An escrow waiver will typically mean a lower monthly payment — and a more consistent one, at that.
Here’s why: With an escrow account, you will be required to put money toward your taxes and insurance costs each month, so unfortunately, it will lead to a higher monthly mortgage payment.
It also means your payments are more likely to fluctuate. Your servicer will conduct an escrow analysis annually to determine how much you need to set aside for projected taxes and insurance costs. If those are expected to rise, then your escrow requirements (and subsequently your monthly payments) will jump too.
Additionally, if your taxes or insurance premiums are higher than estimated one year, your servicer may increase the amount you put into your account to make up for the escrow shortage .
One other consideration is that your taxes and insurance premiums will be totally your responsibility when you waive an escrow account. So, not only do you need to track those deadlines and make the payments all on your own, but you’ll also need to save cash throughout the year to ensure you have enough money to afford the payment when the time comes. This can be hard if you don’t have a solid budgeting and saving system in place.
Finally, there are costs to think about. To set up an escrow account, you’ll be required to make an initial deposit at closing, which can increase your closing costs quite a bit. With an escrow waiver, there may be a fee — either a slightly higher interest rate or a percentage of the loan amount. You’ll want to compare both of these costs when making your decision.
Learn more: Cash to close — What you’ll pay on closing day
How to apply for an escrow waiver
To get an escrow waiver when buying a house, you’ll need to formally request one from your lender before closing day. Whether it’s allowed will largely depend on what mortgage type you have. For example, FHA and USDA loans aren’t eligible for escrow waivers, though you may be able to get one on VA and conventional loans, depending on your down payment amount and your lender’s policies.
What if you already have a mortgage and want to request a waiver later? Again, your eligibility will depend on the company.
With a conventional loan, you’ll typically need a loan-to-value ratio (LTV ratio) of less than 80%, which means your mortgage balance is less than 80% of your home’s market value. You also must be current on your mortgage payments. You also can’t have any payments scheduled to go out of your escrow account for the next 45 days.
If you’re considering an escrow waiver, you’ll need to contact your mortgage lender or servicer. The lender is the company that gives you the home loan, and the servicer takes over your mortgage payments once you’ve closed on the house. (Sometimes the lender and servicer are the same company.) They’ll walk you through the eligibility requirements for your loan as well as any costs you might face for the waiver.
You might also need to submit a formal written request, fill out an application, or submit documentation (like proof of on-time payments, credit report, property tax records, or a copy of your homeowners insurance policy), but these depend on the lender.
Your eligibility for an escrow waiver may also depend on your property location. If your home is in a flood zone or is a particularly high insurance risk, it may not be eligible.
Escrow waiver FAQs
What types of mortgages allow escrow waivers?
Depending on the lender, you may qualify for an escrow waiver on a conventional or VA loan . However, you’re required to have an escrow account for FHA loans and USDA loans .
Is an escrow waiver worth it?
An escrow waiver might be worth it if you’re good at budgeting and saving, and you can stay on top of your property tax and home insurance bills. The big benefits of an escrow waiver are that it reduces your monthly mortgage payments, ensures your payment amount isn’t affected by changes to your taxes or insurance, and allows you to earn interest on your savings if you keep the money in a high-yield savings account .
How do I avoid escrow waiver fees?
Some lenders will charge an escrow waiver fee, while others will charge a slightly higher interest rate on your mortgage loan. You will want to run the numbers to see which is the best choice for your finances. If you’re still shopping for the best mortgage lender , this factor could help you choose a company.
How much down payment do I need to waive escrow?
On a conventional loan , you’ll need to make at least a 20% down payment in order to qualify for an escrow waiver. Talk to your lender, though, as some companies may have more stringent requirements.
Does waiving escrow increase your interest rate?
It can, but it depends on the mortgage lender. Some lenders charge a fee, while others offer a higher interest rate to account for the added risk.
Laura Grace Tarpley edited this article.
