Can I separate tax and insurance payments from my mortgage payment?
It may or may not be possible for you to take on the responsibility for making regular property tax and insurance payments on your home.
Separating tax and homeowner's insurance payments for your mortgage's principal and interest payment is most commonly done at the time the mortgage is made; this "escrow waiver" by the lender allows you to take care of your property taxes and insurance payments. In many cases, the lender will often charge a fee, usually a quarter-to-half percentage point of the loan amount for allowing you to do this.
Escrow waivers can take place on "private" mortgages (those made for a lender's own portfolio), for those sold to Fannie Mae or Freddie Mac and on VA-backed mortgages. That is to say that these entities don't mandate or require the escrowing of theses funds, but many lenders install their own requirements in order to better manage risk. However, FHA-backed loans do mandate that the lender escrow funds for the payment of taxes and insurances.
From Fannie Mae's Selling Guide (B2-1.5-04):
Escrow Waivers
Fannie Mae advocates the establishment of an escrow account for the payment of taxes and insurance, particularly for borrowers with blemished credit histories or first-time homeowners.
Unless required by law, lenders may waive escrow account requirements for an individual first mortgage, provided the standard escrow provision remains in the mortgage loan legal documents.
Lenders cannot waive an escrow account for certain refinance transactions or for the payment of premiums for borrower-purchased mortgage insurance (if applicable). When the requirement for an escrow account is waived, the lender must retain Fannie Mae’s right to enforce the requirement in appropriate circumstances.
Lenders must have a written policy governing the circumstances under which escrow accounts may be waived. When a lender permits escrow waivers, subject to the mortgage documents and applicable law, the lender’s written policies must provide that the waiver not be based solely on the LTV ratio of a loan, but also on whether the borrower has the financial ability to handle the lump sum payments of taxes, insurance, and other items described above.
A lender or servicer will deny you an escrow waiver for your mortgage if:
- You have received a prior loan modification or previously were permitted to waive escrow payments but failed to make all required payments in a timely manner;
- You have had any late mortgage payments within the 12 month period preceding your request to waive escrow payments;
- You have had any 60+ day delinquency in making your mortgage payment within the last 24 months preceding your request; and
- Your mortgage's current loan-to-value ratio (LTV) is 80% or more of the original appraised value of the home.
Depending upon your lender's policies, it might still be possible for you to separate the taxes from your mortgage payment. Fannie Mae requires that the lender evaluate your ability to make these regular lump sum payments and does not allow for a waiver to be granted solely on the basis of your loan's current loan-to-value ratio. Also, this arrangement isn't allowed for certain kinds of mortgage refinance transactions.
You should contact your servicer to see if this can be done for your loan. To find that, check your statement for a customer service number or website address.
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This article was written by Keith Gumbinger. With over 35 years as an expert observer of the mortgage and consumer debt industries, Keith's insights have been featured in tens of thousands of articles across prestigious publications like The Wall Street Journal, USA Today, The New York Times and more. He has authored multiple consumer guides on first mortgages, refinancing, home equity, and more, and is the primary researcher and writer of HSH.com's MarketTrends newsletter.
