When a Veteran borrower applies for a VA mortgage loan and closes the deal, they’re responsible for more than just making their monthly mortgage interest and principal payments on the VA mortgage loan. There are property taxes, hazard insurance premiums (also referred to as home owner’s insurance policy for fire, tornadoes or hurricanes), and often there are Homeowner Association dues from the subdivision you purchase in. Timely payment of these items–especially property taxes–is crucial and the Department of Veterans Affairs tasks the lender with the responsibility of making sure such payments are made in a timely manner.
That is one reason why most lenders require an escrow account for a VA loan applicant–it gives the lender the ability to pay the required taxes and insurance without waiting for the borrower to send in the annual payments. Escrow accounts are not required by the VA, but all of the lenders we sell loans to require this type of account as condition of the mortgage loan. You are PRE-Paying your taxes and insurance – meaning that if the tax bill was going to be $2400, the lender would be collecting $200 a month for taxes, and when you get your bill for taxes, you send it to the lender to pay!
With an escrow account, the lender must operate the account according to the laws of the Real Estate Settlement Procedures Act or RESPA. You will not receive interest on this account… but you don’t have to figure out how to pay a $2400 tax bill (for instance) at the end of the year, because you have been contributing 1/12 of that bill with each of your monthly housing payments! 8o)
Those laws include a full disclosure requirement. The lender must furnish the buyer with an “initial escrow account statement”, listing all the activity that will happen on the escrow account including payments made by the borrower and disbursements from the account. RESPA laws require the initial escrow account statement to be furnished when the loan closes or within 45 days of closing. The lender must also supply an annual account of the escrow activity plus any changes for the coming year.
The escrow account does make it simpler to manage routine-but-essential payment issues like property taxes… but at closing, you must establish this account. If you close in June (for instance) and your annual tax bill is sent in September and DUE in December (as it is in Wake County NC) then at the June closing the Seller will be charged for 5 months of taxes – and you will be required to pay in somewhere close to 5 months of taxes. At the end of the year – you will have made payments into the account, and you should have plenty to cover the tax bill.
Let’s assume you pay in MORE than what you were billed. In that case, the lender would review your account, and lower your payments for the next year! Same thing runs true if you’ve UNDER paid… then your monthly payment might go up some.