"Critics worry about homeowners failing to save enough money to make lump-sum payments for taxes and insurance if not compelled to do so by an escrow account."
One of the country’s highest-volume lenders announced it will allow borrowers to opt into an escrow-free loan structure. United Wholesale Mortgage reports it will waive escrow accounts and fees for all borrowers, regardless of their downpayment size or credit score. The lender predicted borrowers might save as much as $3,625 on a $300,000 mortgage in closing fees related to escrow.
Some industry professionals have been skeptical of the new practice. Critics worry about homeowners failing to save enough money to make lump-sum payments for taxes and insurance if not compelled to do so by an escrow account. United Wholesale Mortgage president and CEO Mat Ishbia responded to these concerns and disagreed with skeptics. He said all qualified borrowers are “all high-quality buyers that are approved through automated engines at Fannie Mae and Freddie Mac, and verified by our underwriters.” Fannie Mae and Freddie Mac both declined to comment on the lender’s new program.
What is Escrow For?
Escrow accounts have long been standard features on mortgage loans in the United States. They require a regular, predetermined deposit of money, either monthly or in full. This money is held by the bank to pay property taxes, hazard-insurance premiums, and other bills that come due only occasionally. Escrow accounts protect lenders from liens and foreclosure that could endanger their collateral, the borrower’s property.
Risks & Rewards
Waiving escrow requirements could reduce the cost of conventional loans on housing. This could expand the pool of buyers able to obtain a mortgage and own a home. However, these upfront savings may translate to long-term losses if the borrowers fail to save up for payments usually paid through escrow accounts.