VA Loans: Property Tax and Insurance Requirements
When buying a home with a VA-insured loan, borrowers learn that the Department of Veterans Affairs has a set of requirements which include “sufficient hazard insurance” and payment of all property tax. The VA loan program, like FHA loans, views non-payment of property taxes to be a violation of the loan agreement.
But VA loan rules do not require a lender to establish an escrow account for the taxes and insurance on properties bought with VA mortgage loans.
A lender who claims VA rules force them to require escrow accounts is not being honest, but the lender does have the right to make escrow accounts for taxes and insurance a mandatory part of doing business with that particular lender.
According to the VA’s official site, the rules are clear:
“VA does require that lenders ensure that the property is covered by sufficient hazard insurance at all times and that property taxes are paid. Most lenders decide to use escrow accounts to do this, but they are not required by VA and VA has no standards governing them.”
That last line is important to note. The VA has no regulations covering escrow accounts, which are governed by the Real Estate Settlement Procedures Act, or RESPA, and administered by HUD.
Borrowers should pay close attention to the details covering an escrow account they may be required to use as part of their VA loan. According to RESPA guidelines, escrow account information is listed on the required Good Faith Estimate, which will tell the borrower whether there is an escrow account required or not. Borrowers will be informed about the escrow requirements and any amount which may be due into that account as part of the loan requirements.
There is a clause in the Good Faith Estimate which reminds borrowers that the amount deposited in escrow may not necessarily be enough to cover property taxes and insurance. It instructs the borrower to ask the lender about this issue. Just because you have money deposited in escrow doesn’t mean it will cover all of that year’s property taxes and may require additional action (and/or funds) from the borrower — especially in years where property taxes have been increased.
Don’t assume your escrow account will cover those costs until you’ve discussed the mechanics of your escrow account with the lender – know what the procedure is for dealing with possible shortages or related issues, and how they affect your requirements for escrow deposits.