Whether escrow is required on a mortgage depends on your loan type and how much equity you have. FHA loans require an escrow account for property taxes and homeowners insurance for the life of the loan. USDA loans require it for most borrowers. VA loans leave it to the lender, and nearly all lenders require it. Conventional loans require escrow until your principal balance drops below 80 percent of the original appraised value, at which point you can ask your servicer to waive it. A separate federal rule requires escrow for flood insurance any time the property sits in a designated flood zone, no matter the loan type.
FHA Loans
FHA-insured mortgages require escrow for taxes and homeowners insurance throughout the life of the loan. HUD mandates this because the federal government insures the loan against default and needs taxes and insurance to stay current. There is no equity threshold that lets an FHA borrower drop the account. The only way to eliminate escrow on an FHA loan is to refinance into a different loan type.
VA Loans
VA rules are permissive rather than mandatory. Federal regulations say a loan holder “may collect periodic deposits from the borrower for taxes and/or insurance” if the security instruments authorize it.1eCFR. 38 CFR Part 36 – Loan Guaranty In practice, nearly all VA lenders write escrow into the mortgage documents, so most VA borrowers end up with an escrow account.
USDA Loans
USDA Rural Development is explicit. Borrowers with new loans must escrow for taxes and insurance when the total outstanding balance is more than $15,000. Exemptions apply to borrowers on annual payment plans, borrowers with leveraged loans where the primary lender handles escrow, and certain Section 504 loan holders with balances at or below $15,000 where the agency determines there is no risk to its security interest.2USDA Rural Development. HB-1-3550 Chapter 7 – Escrow, Taxes and Insurance
Conventional Loans
Conventional mortgages follow guidelines set by Fannie Mae and Freddie Mac. Fannie Mae requires servicers to deny an escrow waiver request when the principal balance is 80 percent or more of the original appraised value.3Fannie Mae. Administering an Escrow Account and Paying Expenses So if you put less than 20 percent down, you start with a mandatory escrow account. Freddie Mac similarly requires servicers to keep written policies on when escrow accounts may be waived.
Once the balance falls below 80 percent of the original appraised value, whether through regular payments or a larger down payment, the escrow requirement becomes negotiable. The servicer still has discretion. And the calculation uses the original appraised value, not current market value. Even if the home has appreciated substantially, the waiver rule looks at the original number.
Flood Insurance Is Separate
One requirement overrides everything above. If your home is in a designated flood zone and you have a federally related mortgage, your lender must collect flood insurance premiums through escrow for the life of the loan.4Office of the Law Revision Counsel. 42 USC 4012a – Flood Insurance Purchase and Compliance Requirements and Escrow Accounts This applies even if you have waived escrow for property taxes and standard homeowners insurance.
Narrow exceptions exist: lenders with total assets below $1 billion that did not historically require escrow, certain junior liens, condominium or cooperative units covered by a master flood policy, loans with terms of 12 months or less, and business-purpose loans.4Office of the Law Revision Counsel. 42 USC 4012a – Flood Insurance Purchase and Compliance Requirements and Escrow Accounts Outside those cases, flood insurance escrow is non-negotiable.
How to Request an Escrow Waiver on a Conventional Loan
If you have a conventional loan and want to pay taxes and insurance yourself, you have to meet your servicer’s waiver criteria. Fannie Mae directs servicers to deny a waiver request in any of these situations:
- Your principal balance is at or above 80 percent of the original appraised value.
- You have had any delinquency on the loan in the past 12 months.
- You have had a 60-day or longer delinquency in the past 24 months.
- You previously had a loan modification, or you were granted a waiver and then missed payments.
Servicers also cannot waive escrow for monthly mortgage insurance premiums. Those stay in escrow as long as the mortgage insurance is active.3Fannie Mae. Administering an Escrow Account and Paying Expenses
To start, contact your servicer and ask for its escrow waiver application. Each servicer has its own form. You will typically need a copy of your most recent property tax bill and your insurance declaration page. Most lenders charge a one-time waiver fee, commonly around 0.25 percent of the remaining loan balance. Review generally takes 30 to 60 days.
Government-backed loans (FHA, VA, and USDA) generally do not allow escrow waivers. On those loans, the practical route to eliminating escrow is refinancing into a conventional mortgage with at least 20 percent equity.
What You Take On If You Waive Escrow
Waiving escrow means you are solely responsible for paying taxes and insurance premiums by their due dates. Miss one, and the consequences are real.
If your homeowners insurance lapses, your servicer is required to buy force-placed insurance on the property. Federal rules require the servicer to send a written notice at least 45 days before charging you, followed by a reminder at least 15 days before the charge.5eCFR. 12 CFR 1024.37 – Force-Placed Insurance If you don’t produce proof of coverage in that window, the servicer places the policy. Industry investigations have found force-placed premiums typically run two to ten times higher than standard homeowners coverage, and the policy generally covers only the lender’s interest in the structure, not your personal property or liability.
Late property taxes carry their own risks. Most jurisdictions charge penalties and interest on delinquent taxes, often in the range of 9 to 12 percent annually. Prolonged non-payment can lead to a tax lien and eventually a tax sale. A tax lien can also put you in default on your mortgage, since most loan agreements require you to keep taxes current.
Before asking for a waiver, be honest about whether you will set the money aside each month. A dedicated savings account with automatic transfers that match what the servicer would have collected is one way to stay on track.
What Changes After a Waiver
Once a waiver is granted, you will get a revised monthly payment schedule that removes the escrow portion. Your payment drops by the amount previously collected for taxes and insurance, but you still owe that money — you just pay it directly.
Any balance remaining in the old escrow account has to come back to you. Under RESPA, a surplus of $50 or more must be refunded within 30 days of the account analysis.6eCFR. Part 1024 Real Estate Settlement Procedures Act (Regulation X) The refund typically arrives as a check or a credit to your loan.
A waiver does not automatically carry over if you refinance. With a new lender, you will fund a new escrow account at settlement if that lender requires one, then wait for your previous servicer to refund the old balance.7Department of Financial Services. Mortgage Escrow Account – What You Need To Know With the same lender, the existing account may transfer. Either way, you will need to request a new waiver from the new loan’s servicer to keep managing taxes and insurance on your own.