VA Loan Articles
Do VA Loans Require An Escrow Account?VA loans have a variety of requirements--but not all of those requirements are part of the VA loan rulebook. Some are rules set and enforced by the lender. VA loan guidelines, for example, establish minimum requirements for borrowers in terms of credit and other qualifying factors. But there's no rule that forces a bank to use the same minimums. A lender is free to set higher standards for borrowers as long as those standards don't violate the terms of the VA loan program.
Another area where the lender is free to set requirements? Escrow accounts for payment of property taxes and/or other costs required as part of a VA loan. The Department of Veterans Affairs does not require escrow to be used, but many lenders do.
The Real Estate Settlement Procedures Act, or RESPA for short, enforces a limit on the amount of money a lender may require the borrower to hold in escrow. RESPA laws also say the lender must issue statements for the initial balance in the escrow account and send out an annual report so that the escrow account can be monitored by the borrower.
RESPA laws do not require a minimum deposit or "cushion" amount, but the law does permit lenders to require one, "equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails" according to the rules.
One important issue to keep in mind about these escrow account requirements--in the past some borrowers were not required to keep the maximum amount allowed by law in escrow. But today, lenders may now be requiring the maximum allowable amount--that could be perceived as an increase in the escrow terms, but it's really a matter of the lender asking the borrower to deposit the maximum currently allowed (as opposed to an increase in that maximum allowed by law).
What should borrowers know about this? According to HUD.gov, "Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion."