What does it matter if I’m a “first-time home buyer”?

When I was trying to purchase that condo earlier this year, someone was very confused that my lender was allowing me to waive my escrow account. This person determined, I’m assuming, based on my age that I was a first-time home buyer and didn’t understand why a lender would let a first-time home buyer waive the escrow account.

I explained that I had done the math and since the property taxes are such a small amount* (they’ve been around $3,200 for the last couple of years on my condo), the escrow account was more complicated than necessary.

This person then told me that my lender must really trust me because normally lenders don’t waive escrow accounts for first-time home buyers.

Why does it matter if I am a first-time home buyer when I fit the characteristics of a “good” buyer?

  1. I brought 20% to closing, in addition to all of the closing costs.
  2. I kept about $32,000 in reserves after closing.
  3. I don’t have a long  credit history, but I have never missed a payment.
  4. I have been regularly contributing to my 401(k) and have accrued a balance of about $30,000 in a few short years of working.
  5. I have never overdrawn my checking account. I didn’t actually even know that word existed until a few years ago.
  6. I took out an auto loan and paid it back in 12 months, with the payments coming directly out of a savings account.
  7. My proposed mortgage payment is under 15% of my gross monthly salary, excluding bonuses. If you add in the HOA dues, you’re still looking at under 20% and even throwing in the property taxes doesn’t bring you up to 25%.
  8. I have been with the same employer for the sufficient amount of time (two years), with a regular, strong paycheck.

Looking at the above picture, I think that my situation is probably not what the notary thought of as the “normal” first-time home buyer situation.

Why did I choose to waive my escrow account? I felt that it was just as easy to set aside the funds myself, rather than into an escrow account and I’ll just track them in my normal spending plan and then send the money off to the county automatically via bill pay when it’s time. It didn’t seem that complicated.

Readers, do you pay your property taxes yourself or do you use an escrow account with your lender?

*I can’t believe I’ve gotten to a point where $3,200 feels like such a small amount, but honestly, I could pay that out of cash flow in a month fairly easily with a small bit of juggling (no savings, mortgage pre-payment and only enough of a 401(k) contribution to get the match). And considering that the taxes are paid in two installments each year in my county, I wouldn’t need to reduce the 401(k) contributions to be able to pay the property taxes.

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24 thoughts on “What does it matter if I’m a “first-time home buyer”?

  1. Wow, waiving the escrow account never came to my mind but sounds like a great idea! I will do that when I’m ready to purchase my third home.

    • Thanks! I’m not sure that I would do it myself if I had multiple homes, but with only one, it seemed like it would fit into my existing cash flow routine just fine.

      • The first home is now a rental. After the second home gets paid (40k left) my wife and I will make that a rental and move into a third home.

        The escrow takes a portion of your money each month in anticipation of when property taxes come due. I’d rather keep that money and invest for my own benefit :)

  2. We don’t have escrowed accounts for property tax in the UK. You can pay online in either 10 monthly payments or 1 annual payment – all from debit however (the government is smart that way).

    What I don’t like is that as a renter I still have to pay the property tax, however.

    • Europe is so great that way. Coworkers that come over from Europe don’t understand why their landlord won’t take their bank account information!

      Wait, do you pay the property tax directly? Or do you just mean indirectly?

      • Wow, that’s crazy. My credit union was willing to let me do it at 80% LTV, even though I couldn’t get the best interest rates on a condo until 75% LTV. Condo insurance is so cheap (mine was set to be $155/year) and my insurance company lets me do monthly withdrawals at no charge, so it was just the property taxes I would have to escrow.

  3. In Canada, I think, it’s standard for a first time home buyer to have an escrow account, but I’d assumed that’s because first time home buyers are typically not as solid as you are – I think if we have more than 20% down the rules change by quite a bit. It’s great that you can waive them!

    • I’d be curious to learn if that’s because first-time home buyers typically put down less or if you need to put down more like 30% to be able to waive it!

  4. Clearly that person is not used to seeing responsible, well-funded buyers like yourself. Sadly Canadian banks have, for the last five years, busily been finding ways around goverment requirements (already an extremely low bar) rather than asking tough questions like that individual asked of you (even though he or she was clueless). We’re in for a penny and for a pound just like America was- even though we lie and say we’ve never had NINJA 0%-down mortgages (we definitely have).

    • I really don’t understand how it even makes financial sense to get a 0% down mortgage – you’re paying so much in PMI and mortgage payments, that you’re probably spending more than you would to rent a comparable house.

      I also don’t get why the banks that service the mortgage don’t have to keep it on their books. That would make them actually care about the financial situation of the buyer far more and then we wouldn’t have these messes…

  5. I had escrow on my original loan, but not when I refi’d. Usually you will get a better rate (25 bps less) if you take the escrow option, but with this particular bank, there was no difference in the loan cost, so I figured i’d be in control of my prop taxes so that I can bunch my deductions if I think I will make more or less in a certain year.

    • Makes sense. In my county, you can’t pay either half in a timeframe that would allow you to do that, so that wasn’t in my reasons. At this particular credit union, the rates were the same regardless of whether I escrowed or not.

  6. Lenders really try to take advantage of first time home buyers. During the process of purchasing my home, I kept catching them trying to sneak in fees here and there, as if I’d overlook them and when I’d question it, they’d stutter and try to explain. I tried to fight the escrow account as well. My property taxes are only $1400/yr here, and less than half that once I file for the homestead exemption. I can just write a check that at the end of the year! Due to my loan type, they refused though, so I’m stuck with it, and had to pay very high fees for it. Still makes me angry!

    • Ugh, that sucks! I can’t believe that you a) didn’t have a choice and then b) got charged high fees for it :/ Wow, $1400/yr property taxes! That’s pretty low :)

      I had one credit union mortgage rep almost get mad at me for not choosing them when they had the same rate and almost double the closing costs.

  7. We had an escrow account on the condo we just sold. While very convenient they always over estimated how much we needed each month. I was assuming we would not escrow with the house we are about to buy. I’ll have to do some research after seeing Nicole and Maggie’s comment. It never even occurred to me that it would not be possible.

    • That’s what I figure could happen – they way overestimate. And since I can cash flow the property taxes so easily, I’d rather just do it myself. My mom actually didn’t even know escrow accounts exist nor did she understand why the bank would pay my property taxes for me!

      Good luck – I hope you can avoid escrow!

  8. I got an Escrow account but only once they told me there would not be any fees associated with it. I’m sure they do overestimate it but I always liked the peace of mind it gave me that I don’t have to worry about paying a huge amount at a certain point. However, since I started really taking control over my finances, I think I may want to redo this strategy and pay it on my own.

    • That makes sense. I actually almost considered doing it for the peace of mind. But then I realized that they don’t always estimate correctly either and they could OVER or UNDER estimate. I would look into more information on how your county takes property taxes (or whoever you pay your property taxes to). I was able to find a ton of that information online, such as when you get the bill in the mail, when payments are due, etc. Plus, you could see past payment and bill records as well. I love the internet!

  9. Lenders often charge for waiving escrow. With today’s low interest rates, it’s not worth paying the escrow waiver fee for the privilge to pay taxes and insurance on your own. In addition, in some states escrow accounts are required to pay interest. The required minimum interest rate written into law years ago can be higher than the best rate you can find today. In that case you are actually better off having an escrow account.

    • Escrow accounts in my state are non-interest bearing. And the lender fees did not change regardless of whether I had an escrow account with this particular credit union. I would definitely go with an escrow account if there fees associated with waiving it.

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