VA Loans and Escrow - Explained

How Does Escrow Work With a VA Loan?

Escrow is a process designed to make real estate transactions smoother and less stressful for buyers and sellers. It works by using a neutral third party to hold and manage funds, documents, and other assets until certain conditions are met.

To understand escrow in simpler terms, think of it as giving your money to a trustworthy friend who handles your bills for you.

For instance, let's say you're buying a house with a VA loan. When you close on a house, you give the escrow company enough money to cover your property taxes, homeowners insurance, and any other expenses that need to be paid annually. Instead of having to make one large payment each year, the escrow company pays those bills for you over the course of 12 months. This makes budgeting and managing your finances much more straightforward.

Do VA Loans Require Escrow?

The VA does not require escrow accounts, and it's up to the individual lender to decide whether or they want to require the use of escrow in the context of the home loan process. While mortgages backed by the Department of Veterans Affairs have no hard rules about escrow, most VA lenders do. Borrowers can obtain an "escrow waiver" with requirements similar to those used for conventional loans.

It's important to note that escrow isn't different for VA loans. Instead, it's just a tool that can be used with any type of mortgage. However, if you're using a VA loan, it's vital to talk to your lender about the specifics of escrow and make sure they understand the details of your VA loan.

Escrow for VA Loan Homebuying

When buying a home with a VA loan, there are many steps involved, and one of them might be setting up an escrow account. In homebuying, an escrow account is set up to hold funds for property taxes and insurance premiums.

Here's what you need to know about escrow when using a VA loan:

How Do You Know If You Can Use an Escrow Account?

VA loans don't require an escrow account. Lenders determine whether they want to ask for one or not. Some lenders might require an escrow account for property taxes and insurance premiums, while others may allow you to opt out of that requirement.

Who Do You Talk to About Using an Escrow Account When Buying a House?

You should talk to your lender if you're using a VA loan and have questions about setting up an escrow account. They can provide you with more information about their specific escrow requirements and how it can benefit you when buying a new home with a VA loan.

Refer to this comprehensive guide covering the VA loan process whenever you have a VA loan-related question.

How is it Lumped Into Mortgage Payments?

If your lender requires an escrow account for your VA loan, your property taxes and insurance premiums will be lumped into your monthly mortgage payment. What you pay each month adjusts based on the total amount due for these expenses. The lender will then hold the funds in the escrow account and pay the bills on your behalf when they are due.

Escrow for Insurance and Taxes

When a VA borrower closes on a home, the lender will establish an escrow account. The borrower funds this account through an initial deposit, which covers the first year of taxes and insurance premiums. The lender will then make monthly deposits into the account to cover future payments. When these expenses are due, the escrow company pays them on behalf of the borrower.

Is Escrow for Insurance and Taxes Required?

The Department of Veterans Affairs does not require VA borrowers to have an escrow account for their property taxes and insurance premiums.

However, most lenders do require it as a condition of the loan. This is because it provides an additional layer of security for the lender. By ensuring that property taxes and insurance premiums are paid on time, the lender can be confident that the property will not fall into disrepair or face legal problems that could impact the loan's value.

Who do I Pay Escrow to?

VA borrowers pay their third-party VA lender, a lender that’s approved by the VA to originate and manage VA loans. These third-party lenders provide VA loans to eligible veterans, active-duty military members, and their families. These lenders are not affiliated with the Department of Veterans Affairs but are approved by them to offer VA loans. They are typically private financial institutions such as banks, credit unions, and mortgage companies.

When borrowers receive a VA loan from a third-party lender, they are responsible for making their mortgage payments directly to the lender. The lender uses the payments to cover the principal, interest, taxes, and insurance on the property.

What happens if they take more money than the consumer owes?

If a lender mistakenly takes more money from the borrower than they owe, the borrower should contact the lender immediately to rectify the situation. The lender is required to refund any overpayments to the borrower. However, if the borrower owes more money than they paid, they will be responsible for paying the remaining balance.

Do VA borrowers get that money back at the end of the year?

At the end of the year, lenders may issue a refund if the borrower overpaid their escrow account, which is used to pay property taxes and insurance premiums. The refund is typically issued within 30 days of the end of the year.

Can Escrow be Waived on a VA Loan?

In some cases, VA lenders may allow borrowers to waive an escrow account. However, this is not a common practice, and VA loan borrowers must typically meet certain criteria to qualify. For example, borrowers may need a high credit score, a low loan-to-value ratio, and a substantial down payment.

It is important to note that waiving an escrow account comes with certain risks. If borrowers fail to pay their property taxes or insurance premiums on time, they could face late fees, penalties, and even foreclosure. Without an escrow account, the borrower makes these payments directly to the appropriate parties.

The Bottom Line on Escrow for VA Loans

An escrow account is not required to take out a VA loan, but lenders often recommend doing so to ensure that your property taxes and insurance premiums are paid on time.

As a reminder: an escrow account is a separate account held by a third party, like a bank, that collects and pays specific expenses on behalf of the borrower. This can include property taxes, insurance premiums, and other expenses related to the property.

If you are a VA loan borrower and have questions about escrow accounts or whether it is necessary for your loan, you must talk to your lender. They can provide more information about the specific requirements for your loan and help you understand the benefits and risks of using an escrow account.

Ultimately, whether or not to use an escrow account is a personal decision that should be made based on your individual needs and financial situation.