Does the term “escrow” mean anything to you? If you’re a first time homebuyer, the word may be foreign, but it’ll soon become very familiar as you take steps towards homeownership.
Establishing escrow accounts is a part of every VA home loan. Escrow accounts are accounts established to collect funds on a monthly basis for items such as property taxes and homeowners insurance that are due once a year. By establishing escrow accounts, the company that services your mortgage is able to collect one-twelfth of the total amount for these yearly expenses, along with your monthly principal and interest payment. This is why your monthly payment is often referred to as PITI: Principal, Interest, Taxes and Insurance. By collecting a smaller amount monthly, you don’t have to come up with a large sum of money all at once.
What does that mean for you?
To establish your escrow accounts, a certain amount is collected at closing. In general, three months worth of property taxes and three months of homeowners insurance are collected to establish these accounts.
It’s important to note here that in addition to the 3 months of homeowners insurance collected for your escrow accounts, a full year of homeowners insurance will also be included in your closing costs as a prepaid item, since the first year’s policy premium is due up front. When calculating closing costs, it may be easier to just factor in 15 months worth of homeowners insurance premium to cover the upfront cost as well as the escrows.
Property taxes can vary greatly from one state, county or region to another. As a result it’s difficult to determine with certainty what the property taxes will be until you’ve selected a specific property. Until you provide your VA mortgage specialist a property listing or address she will just use an estimate that may be higher or lower than the actual figure. Due to the variances in property taxes from location to location it’s important to send your VA mortgage specialist the address to any property before you make an offer, to ensure that you still meet residual and DTI ratio guidelines.
To get an idea of the property tax medians in your area, you can check out this article from Forbes ranking median 2007 property tax amounts by county. Although the Forbes article can give you insight into median numbers in your area, it is still very important to get the actual figures for the property you desire to provide to your VA mortgage specialist so that you don’t run into any snags as you get further into the homebuying process.
Homeowners insurance is insurance you obtain to protect you from loss or damage of your home. Unlike property taxes, which are set in stone, you can shop around for the best deal on homeowners insurance. If you choose to purchase a home in a flood zone you will also have to purchase flood insurance to protect your investment from flood damage. I would suggest you get quotes from at least three different homeowners insurance providers: one local, one national and the company your currently use for auto. But keep in mind the more quotes you get, the more likely you will be to find a great deal.
You can also look at bundling auto, life and home to get bigger discounts. It’s important to notify your VA mortgage specialist of the estimates you are receiving for this insurance so that she can compare the cost to her current estimated figures. This will provide your VA mortgage specialist the opportunity to recalculate your DTI ratio to ensure you’re still meeting all loan requirements and can proceed without a hitch.
It’s possible that the home you purchase will require additional escrow accounts for expenses such as homeowners association dues. As these are on a case-by-case basis, you should consult with your VA mortgage specialist to determine if you will require any additional escrow accounts.
The cost to establish these escrow accounts is included in your estimated closing costs. The majority of veterans are able to negotiate their contract so that the seller pays all or most of the closing costs for the loan. Whether you’re paying your own closing costs or the seller is footing the bill, it’s important to communicate with your VA mortgage specialists on the estimated costs for these fees, because they will have a lasting impact on your monthly mortgage payments.
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Photo Courtesy Dan Ancona