VA Loans: How Escrow Works There are two types of escrow accounts: One is used during the purchase process. The other is used after home has closed; it holds funds for periodic payments that will be required on the home, such as property taxes and homeowner's insurance. Escrow Account During Home Purchase Earnest money may be required on a home purchase before the down payment is made; it acts as a guarantee that the prospective buyer will follow through with the purchase. Usually, earnest money is not refundable after a specified number of days. Both the earnest money and the purchase agreement are deposited with a financial institution or title company until the purchase is completed. The title company or the financial institution acts as an independent and impartial party during the time the home purchase is in process. Escrow Account After Purchase Although the VA does not require escrow accounts on mortgages, many lenders require them to make sure that the insurance remains current and the property taxes don't become delinquent. The VA doesn't prohibit lenders from requiring an escrow account on VA loans and some lenders will use an independent, third party to manage the escrow and payments made from it. The borrower may receive annual statements from the third party rather than the lender. If the seller is agreeable, he or she may pay some of the initial costs of the loan, such as the initial escrow payment. VA permits the seller to pay a maximum of 4 percent of the loan in concessions to the buyer. The total annual premium for property insurance and taxes, plus other fees that may be required, are divided by twelve and added to the total mortgage payment. This results in the total monthly payment for the buyer and should be included when calculating the amount for which the buyer is qualified. A deposit may be required at closing to cover the impound account for the first year's escrow account but federal law limits the amount of the escrow to be held. Each month, the additional amount paid by the borrower is deposited into the escrow account and when it's time to pay the annual insurance or the semi-annual property taxes, the amount is deducted from the impound account and sent to the appropriate entity. Usually, the buyer selects the insurance company, sets up the account, and then provides the billing information to the lender. The buyer is responsible for contacting the tax collector regarding any property tax credits or adjustments that are available. The buyer is also responsible for obtaining the best homeowner's insurance rate possible. The financial institution or the third party pays the bills but cost-effectiveness is the responsibility of the buyer.
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