The Department of Veterans Affairs (VA) guarantees mortgages for military personnel and certain relatives of veterans. This government guarantee protects lenders by reimbursing them in the event of homeowner default. VA borrowers benefit from no down-payment requirement, competitive interest rates, and home retention features which the government offers struggling borrowers. Escrow or impound accounts are generally required on all new VA loans, and the terms for waiving them may vary by lender.
VA-approved lenders originate the loans, and the department guarantees them. The department is not responsible for servicing the account or collecting monthly payments on the loan. The lender or a servicing company manages the escrow account. Most guidelines regarding escrow accounts depend on the loan servicer and its investor, if any. Lenders use escrow accounts to maintain and allocate payment for property taxes and hazard insurance. The borrower pays 1/12 of these costs each month to the servicer, which then pays the semi-annual tax bills and insurance premium on behalf of the borrower.
The escrow account is designed in the best interest of the lender. It ensures that a borrower makes payments to avoid a tax lien, and does not let the hazard protection lapse. First-time home buyers, or those who do not want to worry about sending a late payment, may benefit from establishing an escrow account. Those who are accustomed to making these payments on their own, or are unsatisfied with their servicer's management of the account, may want to waive escrow.
The loan-to-value ratio represents the loan amount in relation to the home's market value, expressed as a percentage. A VA loan for a home purchase generally has a high LTV -- up to 100 percent. Most VA lenders require the establishment of an escrow account at origination, or if the borrower has a history of missed payments. Escrow helps minimize the risk associated with lending at a high LTV. Generally, a borrower must have at least 10 to 20 percent equity in their property — an 80 to 90 percent LTV — to avoid or cancel an escrow account. This is achieved by putting a large down payment on a home, or by paying down the loan balance over time.
A VA lender that requires escrow on a loan with 20 percent or more down, or a refinance with sufficient equity, may be persuaded to waive the escrow account requirement, according to MSN Money Central. It may also remove or lower a fee associated with waiving escrow if the borrower insists or shops the loan diligently. The VA does not have a mechanism for releasing or waiving escrow. An existing VA mortgage may need to be refinanced for escrow to be waived, according to VA Home Loan News.