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Loans That Don’t Require Buyers To Set Up Escrow Funds

If you have a home mortgage, you probably also have an escrow or impound — a savings account incorporated into your monthly payment and managed by your loan servicer so that your annual property tax and hazard insurance bills get paid on time. Most lenders require them and will allow a waiver only if you pay a higher interest rate or a fee.

But do you really want or need that quasi-parental helping hand from your bank? After all, you pay lots of other bills on time. Why would you forget to pay taxes or insurance premiums on your biggest asset? And by the way, don’t the steadily accumulating funds in your escrow account provide your bank a low- or no-cost pot of cash to use for its own purposes unless restricted by state law?

Now comes the escrow-account buster: In a major break with industry tradition, one of the country’s largest independent mortgage companies wants to free the masses from mandatory escrow accounts and let borrowers go DIY. Michigan-based United Wholesale Mortgage, which has a network of 7,000 participating brokerage firms nationwide, has begun offering mortgages with no requirement for escrow accounts — and no penalty for the privilege.

“We don’t think it’s right to charge” more — typically a quarter of 1 percent (0.25 percent) of the loan amount — “for something most borrowers can handle” on their own, says Mat Ishbia, United’s president and chief executive. “On a $400,000 loan, is it right to charge an extra $1,000? We don’t think so.” Even more costly: Setting up an escrow on a new mortgage often permits the lender to collect months’ worth of advance payments toward upcoming tax and insurance bills, adding thousands of dollars to closing expenses.

United allows borrowers to waive escrow on all conventional loans with down payments of at least 10 percent. On loans with less than 20 percent down, borrowers need FICO credit scores above 720. With 20 percent down, a minimum 640 FICO score is required.

Escrow accounts have been standard practice for years and have a solid purpose: They avoid situations where borrowers neglect to pay property taxes or hazard insurance premiums, opening the door to a government lien on the house or a loss of the lender’s security interest in the event of a fire or severe damage.

Giant mortgage investor Fannie Mae strongly advocates use of escrow accounts. “We think they’re a good idea,” said Fannie Mae spokesman Pete Bakel. “They give borrowers a scheduled way to pay” bills without worrying about due dates. Fannie accepts mortgages without escrows but requires lenders or servicers to have written policies governing the circumstances under which accounts can be waived. Fannie’s internal guidance says the company “especially” recommends them for “borrowers with blemished credit histories” and first-time homeowners.

Banking industry experts say mortgages without escrow accounts carry higher risks when the economy slows down. Bob Davis, executive vice president of the American Bankers Association, says those elevated risks, plus the need for banks to check on due dates for taxes and insurance and to remind customers, justify extra charges when loans have no escrow accounts.

Ishbia disputes the idea that escrow-free loans are riskier. Based on its own servicing records, “there is no difference” in delinquencies or losses between mortgages with or without escrow accounts, he told me. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says cost-free waivers of escrow accounts are “a great idea,” although he finds that “most people prefer to have an escrow account” because “they don’t want to manage tax and insurance payments themselves.”

So where do you stand? Do you have the discipline to save up enough to pay annual property taxes when they come due? Are you a do-it-yourself type financially — and want to have control of your funds until the bills come due rather than ceding that job to a bank? Do you have income that can vary widely month by month because it’s based in part on commissions or seasonal factors? Maybe you’re self-employed and having control over your monthly cash flows and expenses is crucial?

In these situations, you may be more likely to want to dispense with an escrow account — ideally without a penalty charge. And if United’s new option begins to pull in significant new loan business to participating brokers — that’s Ishbia’s marketing goal — you just might find that your bank or mortgage company is now a little more open to the idea of escrow-free home loans.