When you obtain a mortgage, your lender will likely require a real estate tax escrow and an insurance escrow to protect the lender’s interests.
Q: Is it true once a tax escrow has been created as part of a mortgage loan application or refinancing and the loan has closed, and if the loan is with Fannie Mae, the property tax escrow can’t be removed again?
I had initially applied for a loan modification which did not happen. But now, I am able to make the payments and I requested for the loan servicer to remove the escrow. I was told by law it cannot be removed. Is that correct?
A: While technically the loan servicer gave you correct information, it is not the law that the escrow can’t be removed, but rather the loan rules and guidelines for most loans that are held by Fannie Mae and Freddie Mac.
Once you have a real estate tax escrow in place, the rules allow for the tax escrow to be removed but in limited circumstances. Over time, you will be able to remove the tax escrow once you have made payments on the loan to reduce the loan balance to sixty five percent of the original loan amount.
Very generally, you can also request that the tax escrow be removed if you have had the loan for at least two years, have made all of your payments on time and have either paid down your loan to 65 percent of its original loan amount or you obtain an appraisal showing that the property has increased in value by a substantial amount and the home’s value now results in the loan balance being sixty five percent of the home’s appraised value.
For specific information on removing your real estate tax escrow, you should take a look at your loan documents. In your loan documents, you should have a disclosure from your lender relating to the tax escrow and the manner in which the money will be taken in and paid out. You should have also received a document that outlines the process and the timeline for getting rid of the tax escrow.
Given where the housing market is these days, it’s unlikely that you will find a lender willing to remove the tax escrow from your loan at this time. Lenders will probably take a hard line on tax escrows. If property values fall or a borrower decides that he or she won’t pay on a mortgage any longer, the lender wants to have as much money as possible in reserve to pay real estate taxes.
If real estate taxes aren’t paid, the local governmental body in many states has the right to sell the unpaid taxes off. This tax sale process can lead to the property being sold and not only the homeowner but the lender could be out of luck and lose the equity in the home and the lien security the lender has in that home as well.
For this reason, lenders tread carefully to make sure that real estate taxes are always paid and with any loan given to a homeowner, if the loan balance is seventy or more percent of the home’s value (depending on the lender), the lender will generally require a tax escrow.
Recently, more and more lenders have been requiring insurance escrows not only on single family homes but on condominium buildings as well. On condominiums, the lender would require an insurance escrow not on the insurance carried by the condominium association but on the coverage for the contents in the home which, in a condominium policy, also includes the betterments contained in the condominium.