VA Loans & Escrow – What Is It & How Does It Work?
Although VA home loans are fairly uncomplicated loans to navigate as a first-time home buyer, there can be many unfamiliar terms and phrases that can make the process a bit overwhelming. One of the most common terms that new home buyers are confused by is escrow – what is it and how does it work? If you look up the definition, it states that an escrow is “a deed, a bond, money or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.” However, that definition only manages to complicate matters further. Simply put, an escrow is an account managed by an independent third party that is used to cover your property taxes and insurance. At your mortgage closing, you’ll make your first deposit to your escrow account, followed by additional payments every month as part of your regular monthly mortgage payment. Then, when taxes and insurance payments are due, the escrow agent will allow your mortgage servicer to use the money you have in escrow to make a payment on your behalf. This way, both homeowners and lenders are protected. By having an escrow, the lender is ensured that you can pay your taxes and insurance on time, and you’re protected from being hit with a very large bill once a year that, depending on circumstances, you may or may not be able to cover. Homeowners with an escrow account are able to spread out the payments for taxes and insurance over the course of the year. For example, if your average tax bill is $1200 and your homeowners insurance bill is about $800, your payment would be about $167 a month to cover the cost. It’s important to note that while there are many rules and requirements set by the Department of Veterans Affairs, establishing an escrow account is not one of them. But, many lenders require it as part of their process. The good news is that you can ask the seller to cover these up-front costs as part of the purchase. With a VA loan, a seller is able to pay up to 4% of the loan amount in concessions (in other words, the percentage of the purchase price the seller agrees to contribute toward the buyer). To protect the buyer, the Real Estate Settlement Procedures Act (RESPA) limits the amount of money that a lender can require to be held in escrow. Additionally, your lender is required by RESPA to issue statements for the initial balance in the escrow account as well as an annual report. The most important factor when buying a new home with your VA loan is to make sure that you have a Home Loan Expert who specializes in VA loans, and that you feel completely comfortable and confident that you’re being led to the right decision with certainty. Your Home Loan Expert should be able to guide you through the process so that you have no questions about your benefits, the process and your new home loan.
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