Do VA loans require escrow accounts? The answer is both yes and no. If you’re feeling confused, don’t panic. This isn’t a trick question or a deep, philosophical debate. When you step back and take a look at the full picture, the duality of the answer makes perfect sense.
Do VA Loans Require Escrow Accounts?
How can the answer to a question about loan requirements for escrow accounts be both yes and no? To understand, you’ll need to know what an escrow account is, how VA loans work, the requirements that the U.S. Department of Veterans Affairs (VA) sets for escrow accounts, and the steps that lenders take to meet them.
Escrow Account Basics
As Military.com explains, escrow can have a few different meanings. In this case, escrow refers to an account that is managed by an independent third party. The homeowner deposits money into the escrow account, and the funds are used to pay the property taxes and insurance premiums associated with the home. Most homeowners make their first deposit at the closing table. Additional payments are made each month as part of the regular mortgage payment. When the due dates for property taxes and insurance payments roll around, the escrow agent authorizes the mortgage servicer to use the money in the escrow account to make the necessary payments.
Having an escrow account offers benefits to both the borrower and the lender. The borrower enjoys the convenience of only making one monthly payment. Plus, there’s no need to worry about being hit with a big property tax or insurance bill; using an escrow account spreads the expense out over time, making budgeting easier. How does the lender benefit? They get reassurance that their interest in the property is protected. With an escrow account, there’s less risk that the homeowner will lose the home due to a failure to pay taxes or let vital hazard insurance lapse.
How VA Loans Work
It’s widely recognized that the VA’s home loan program gives qualifying homebuyers a chance to secure a mortgage with great advantages, including no down payment requirement, a competitive interest rate, and relaxed credit standards. However, not everyone understands how VA loans work.
As NerdWallet reports, the VA sets the guidelines for the VA loan program, and it offers a guarantee that reduces the risks involved in making these loans. However, it doesn’t actually make loans. Instead, private lenders provide the loans. While these lenders have to comply with the VA’s guidelines, the VA does allow them to set their own standards too. As a result, homebuyers using VA loans need to worry about two sets of requirements: those imposed by the VA and those imposed by their lender. What does that mean for escrow accounts?
The VA, Lenders, and Escrow Accounts
Do VA loans require escrow accounts? The VA Lenders Handbook spells it out clearly; the U.S. Department of Veterans Affairs does not require a lender who offers a VA loan to establish an escrow account. However, it does place the responsibility for the payment of property taxes, hazard insurance premiums, and other similar items on the lender. As a result, many lenders who offer VA loans require borrowers to fund an escrow account. That’s why answering questions about whether VA loans require escrow can be tricky. While the VA does not insist on the establishment of an escrow account, most of the lenders who actually provide VA loans do. Therefore, anyone hoping to buy a home with a VA loan will likely be required to have an escrow account.
For service members, veterans, and other qualifying borrowers, VA loans offer a fantastic way to buy a home. While borrowers must have the income and credit necessary to qualify for the loan, the availability of 100-percent financing and flexible credit standards allows people to become homeowners sooner. If you have questions about VA loans or other loan products, reach out to PrimeLending: Manhattan, Kansas. Serving those who have served our country is always a pleasure. Our team of friendly, knowledgeable loan experts will listen carefully to your housing goals and work with you to identify the best loan product for your needs. We’ll guide you through the process, emphasizing excellent service, expert insight, transparency, and reliable professionalism along the way. To learn more about our services and how we can help you, contact us today.