A mortgage escrow account is an account your loan servicer uses to collect and pay certain homeownership costs on your behalf.
These costs usually include property taxes and homeowners insurance, but depending on the loan, escrow may also cover flood insurance, mortgage insurance or other required property-related charges.
Escrow can make housing costs easier to budget because you pay a portion of these bills each month with your mortgage payment instead of paying large bills once or twice a year. It also protects the lender by helping make sure taxes and required insurance stay current.
But escrow rules vary by loan type. Some loans require escrow. Others allow an escrow waiver if the borrower, property and loan meet certain requirements.
Escrow Requirements By Loan Type Basics
| Loan Type |
Is Escrow Usually Required? |
What Escrow Usually Covers |
| Conventional Loan |
Sometimes |
Property taxes, homeowners insurance, flood insurance and mortgage insurance when required |
| FHA Loan |
Yes |
Property taxes, homeowners insurance and other required escrow items |
| VA Loan |
Often required by lenders |
Property taxes, homeowners insurance and flood insurance when required |
| USDA Loan |
Yes, when the lender has escrow capacity |
Real estate taxes, assessments, hazard insurance and flood insurance when required |
| Higher-Priced Mortgage Loan |
Usually required for first-lien principal residence loans |
Property taxes and creditor-required mortgage-related insurance |
| High-Cost Mortgage |
Depends on whether another escrow rule applies |
May require escrow if the loan is also subject to HPML, lender, investor or state requirements |
What A Mortgage Escrow Account Pays For
A mortgage escrow account can be used to pay property taxes, homeowners insurance, flood insurance and other charges connected to the property. Federal servicing rules define an escrow account as an account controlled by the servicer on behalf of the borrower to pay taxes, insurance premiums, including flood insurance, or other charges connected with a federally related mortgage loan.
Your servicer estimates the annual cost of escrow items, divides that amount into monthly payments and adds the escrow portion to your mortgage bill. When the tax or insurance bill comes due, the servicer pays it from the escrow account.
How Much Can A Lender Collect For Escrow?
Federal Real Estate Settlement Procedures Act rules, often called RESPA rules, limit how much a lender or servicer can collect for a mortgage escrow account. RESPA is the federal law that governs many mortgage settlement and servicing practices.
At closing, the servicer may collect enough to cover upcoming tax and insurance bills, plus a cushion. The cushion is extra money kept in the account to help prevent a shortage if taxes or insurance premiums increase. Under federal rules, the cushion generally cannot be more than one-sixth of the estimated total annual payments from the escrow account. That is commonly described as about two months of escrow payments.
Servicers must also review escrow accounts each year. This review is called an escrow analysis. It checks whether the account has too much money, too little money or the right amount based on expected tax and insurance bills.
Is Escrow Required For Conventional Loans?
Escrow is not always required for conventional loans. A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the Federal Housing Administration, Department of Veterans Affairs or U.S. Department of Agriculture.
For conventional loans sold to Fannie Mae, lenders may waive escrow requirements for an individual first mortgage unless escrow is required by law. Fannie Mae also says lenders cannot waive escrow for certain refinance transactions or for premiums on borrower-purchased mortgage insurance when applicable.
Freddie Mac does not generally require escrow accounts except for borrower-paid mortgage insurance paid monthly and when escrow is required by applicable law, the mortgage documents or the lender’s own policy.
In practice, many conventional borrowers are required to escrow if they make a smaller down payment, have mortgage insurance, live in a flood zone, have a higher-priced mortgage loan or do not meet the lender’s escrow waiver standards.
Is Escrow Required For FHA Loans?
Yes. FHA loans generally require escrow accounts. An FHA loan is a mortgage made by an FHA-approved lender and insured by the federal government.
HUD servicing guidance says mortgagees must establish escrow accounts and require monthly payments so funds are available to pay taxes and insurance premiums when they come due. A mortgagee is the lender or loan holder.
For borrowers, this means FHA loans usually include escrow payments as part of the monthly mortgage payment. The escrow portion helps cover property taxes, homeowners insurance and other required property-related items.
Is Escrow Required For VA Loans?
VA loans often have escrow accounts, but the Department of Veterans Affairs does not generally impose the same universal escrow rule that applies to FHA loans. A VA loan is a mortgage backed by the Department of Veterans Affairs for eligible service members, veterans and certain surviving spouses.
Even when VA does not directly require escrow in every case, lenders commonly require escrow to make sure property taxes, homeowners insurance and flood insurance, when required, are paid on time. VA also identifies loan servicing as including escrow account management.
Borrowers should assume escrow may be required on a VA loan unless the lender confirms that an escrow waiver is available. If a waiver is available, the borrower remains responsible for paying taxes and insurance directly.
Is Escrow Required For USDA Loans?
Yes, USDA guaranteed loans generally require escrow when the lender has the capacity to escrow funds. A USDA guaranteed loan is a mortgage program for eligible borrowers buying in qualifying rural and suburban areas.
Federal USDA regulations say lenders with the capacity to escrow funds must establish escrow accounts for all guaranteed loans for payment of taxes and insurance. The regulations also say lenders must ensure real estate taxes, assessments, flood insurance and hazard insurance premiums are paid on schedule.
For USDA borrowers, escrow is generally part of the monthly mortgage payment. The servicer collects a monthly amount and uses the escrow account to pay required tax and insurance bills.
Is Escrow Required For Higher-Priced Mortgage Loans?
Usually, yes. A higher-priced mortgage loan, or HPML, is a mortgage with an annual percentage rate above a federal pricing threshold compared with the average prime offer rate. In plain language, it is a loan that is priced higher than the federal benchmark for a comparable mortgage.
Regulation Z generally requires an escrow account before closing for a higher-priced mortgage loan secured by a first lien on the borrower’s principal dwelling. A first lien means the mortgage has first priority against the home if the borrower defaults. The escrow account must cover property taxes and mortgage-related insurance required by the creditor, such as homeowners insurance, liability insurance, mortgage insurance or other insurance protecting the lender against loss.
Some HPML escrow exemptions exist. For example, federal rules include exemptions for certain construction loans, bridge loans, reverse mortgages, cooperative share loans and certain small creditors that meet detailed requirements. Borrowers should not assume an exemption applies unless the lender confirms it.
How Long Is Escrow Required For Higher-Priced Mortgage Loans?
An escrow account required under the higher-priced mortgage loan rule generally cannot be canceled just because the borrower asks right away. Federal rules allow cancellation only after the underlying debt ends or after the borrower requests cancellation no earlier than five years after closing.
Even after five years, cancellation is delayed unless the unpaid principal balance is less than 80% of the original property value and the borrower is not delinquent or in default.
Is Escrow Required For High-Cost Mortgages?
Not automatically under the high-cost mortgage rule alone. A high-cost mortgage is a separate federal category under the Home Ownership and Equity Protection Act, often called HOEPA. A loan can become a high-cost mortgage because of its annual percentage rate, points and fees or prepayment penalty terms.
Regulation Z defines high-cost mortgage coverage using specific rate, fee and prepayment penalty triggers. For example, a first-lien loan can be a high-cost mortgage if the annual percentage rate exceeds the average prime offer rate by more than 6.5 percentage points, subject to other detailed rules.
A high-cost mortgage may still require escrow if another rule applies. For example, escrow may be required if the loan is also a first-lien higher-priced mortgage loan, if the loan program requires escrow, if the lender or investor requires escrow or if state law requires escrow.
What Is The Difference Between HPML And High-Cost Mortgage?
Higher-priced mortgage loans and high-cost mortgages are not the same thing.
A higher-priced mortgage loan, or HPML, is based mainly on how the loan’s annual percentage rate compares with a federal benchmark. HPML rules include a specific escrow requirement for many first-lien principal residence loans.
A high-cost mortgage is based on separate Home Ownership and Equity Protection Act triggers, including rate, points and fees or prepayment penalty terms. High-cost mortgage rules include extra consumer protections and restrictions, but they do not create the same broad escrow requirement by themselves.
State Escrow Requirements
State law can add escrow requirements or change how escrow accounts are handled. A state may regulate whether escrow accounts must earn interest, how escrow funds must be held, what notices borrowers receive or when a lender can waive escrow.
Federal law does not generally require mortgage escrow accounts to earn interest. However, some states require interest on certain mortgage escrow accounts. Whether interest is required can depend on the state, the type of lender, the loan documents and whether federal preemption applies. Preemption means federal law may override a state law in some circumstances.
State requirements can also affect escrow for taxes, insurance, flood insurance and special assessments. Borrowers should review their loan documents and state-specific disclosures to understand whether state law gives them additional rights or requirements.
Can You Waive Escrow?
Sometimes. An escrow waiver means the lender allows you to pay property taxes and insurance directly instead of through your monthly mortgage payment.
Escrow waivers are more common on conventional loans than on government-backed loans. Lenders may consider the loan-to-value ratio, payment history, credit profile, property type, mortgage insurance status, flood insurance requirements and whether federal or state law requires escrow.
A loan-to-value ratio compares the loan amount with the property value. For example, an $80,000 loan on a $100,000 home has an 80% loan-to-value ratio.
What Happens If Escrow Is Short?
An escrow shortage happens when the account does not have enough money to cover expected bills. Shortages often happen when property taxes or insurance premiums increase.
If there is a shortage, the servicer may increase the monthly escrow payment for the next escrow year. The servicer may also offer an option to pay the shortage in a lump sum. Federal escrow rules allow servicers to collect additional deposits to make up shortages or deficiencies, subject to federal limits.
What Happens If Escrow Has Too Much Money?
An escrow surplus happens when the account has more money than needed based on the servicer’s analysis. Federal rules define a surplus as the amount by which the escrow account balance exceeds the target balance.
Servicers must perform escrow analyses and provide annual escrow account statements. The statement explains the account activity and whether the escrow payment will change for the next year.
The Bottom Line
Escrow requirements depend on the loan type, lender policy, federal law and state law. FHA and USDA loans generally require escrow accounts. Conventional loans may allow escrow waivers in some cases. VA loans often use escrow because lenders require it, even though VA rules do not work the same way as FHA or USDA rules.
Higher-priced mortgage loans have special federal escrow requirements for many first-lien principal residence loans. High-cost mortgages are a separate category and may require escrow only when another rule, lender policy or state law applies.
Frequently Asked Questions
What Is An Escrow Account For A Mortgage?
A mortgage escrow account is an account your loan servicer uses to collect and pay certain property-related costs. These usually include property taxes and homeowners insurance. Depending on the loan, the account may also cover flood insurance, mortgage insurance or other required items.
What Is An Escrow Holdback?
An escrow holdback is money set aside after closing to pay for specific repairs or work that has not been completed yet. Instead of delaying the entire closing, the lender may allow closing to happen while holding back funds until the required work is finished.
Escrow holdbacks are not automatic. The lender, loan program and investor must allow them. The borrower may also need documentation, contractor estimates, completion deadlines, inspections and proof that the repair work was finished.
Is Escrow The Same As Closing Escrow?
No. Mortgage escrow usually means an ongoing account used to pay taxes and insurance after closing. Closing escrow usually refers to the settlement process where funds and documents are held until the home purchase or refinance is completed.
Do All Mortgages Require Escrow?
No. Some mortgages require escrow, while others may allow an escrow waiver. FHA and USDA loans generally require escrow. Conventional loans may allow waivers in some cases. VA loans often include escrow because of lender requirements.
Can I Remove Escrow From My Mortgage?
Possibly. Escrow removal depends on the loan type, lender rules, payment history, property type, insurance requirements and federal or state law. Higher-priced mortgage loans generally have stricter cancellation rules and may require escrow for at least five years before a borrower-requested cancellation can be considered.
Do Escrow Accounts Earn Interest?
Federal law generally does not require mortgage escrow accounts to earn interest. Some states require interest on certain escrow accounts, but the rules vary by state and lender type.
Why Did My Escrow Payment Increase?
Your escrow payment can increase when property taxes, homeowners insurance or other escrowed costs go up. Your servicer reviews the account each year and may adjust your monthly payment based on the new estimate.
Does Escrow Cover Mortgage Insurance?
Sometimes. If mortgage insurance is required and paid monthly, it may be collected with the mortgage payment. Conventional, FHA, USDA and other loan types handle mortgage insurance differently, so borrowers should review their payment breakdown and closing documents.
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