Impound accounts, sometimes referred to as Escrow accounts in other parts of the country, are funds set aside to take care of property taxes and insurance when due. Some loans require impound accounts while others leave them as an option. Let’s take a further look at these accounts and what they accomplish.
Mortgage lenders need to make sure property taxes are paid. That’s pretty simple. Property taxes are in a category referred to as a “superior lien” which means they take priority over other types of liens. Lien position takes into consideration which party is paid first in the case of a property foreclosure. The most common lien assignment is due to the date the lien was filed. A first lien would be paid first, then a second and so on.
Unpaid property taxes can lead to a taxing authority to begin foreclosure action to force the sale of the property and pay off the unpaid taxes. That’s why lenders want to be assured property taxes are paid because property taxes are considered a superior lien to a mortgage or home equity loan. In the case of a foreclosure, the taxes are paid first then the remaining amounts go toward paying off the existing mortgage. Lenders also want to make sure the home (collateral) is covered in the instance of a hazard such as a fire or storm. Lenders want some protection against such events.
To provide an additional degree of protection, impound accounts are set up. With an impound account, as each mortgage payment is made, so too is a monthly installment for property taxes and insurance. These monthly amounts don’t get sent to the taxing authorities each month or the insurance agent but accrue in an impound account. There are property tax impound accounts and insurance impound accounts.
When the property taxes come due, the accrued funds are then delivered to pay the taxes, assuring the taxes are paid on time. The same occurs with an insurance impound account. When the insurance policy is up for renewal, the funds are released to the insurance agent. This is all done without the homeowner’s involvement in any way. The homeowner puts money each month in the accounts along with the mortgage payment. That’s the extent of the homeowner’s involvement. The lender’s servicer, or the entity that collects the monthly payments from the homeowner, actually pays the taxes and insurance when due.
Impound accounts can be required or optional. Loans that require impound accounts are government-backed mortgages such as VA, FHA and USDA programs. For loans where the first mortgage balance represents more than 80% of the sales price of the home for most parts of the country and 90% in California, impound accounts are also required. The borrower has no option whether or not to establish these accounts under these circumstances.
For loan amounts that don’t meet the 80-90% threshold, impound accounts are an option. If you have an option, should you set up impound accounts? That’s really up to you. Some homeowners would rather pay the property taxes and insurance when do on their own. Doing so keeps the homeowner’s funds in their checking, savings or investment accounts. The homeowner then pulls out the funds to pay taxes and insurance.
Still others would rather make a smaller monthly installment via an impound account instead of paying taxes and insurance in one lump sum. Doing so creates less of a dent in someone’s bank account when paying in installments instead of once or twice per year. It’s really a matter of personal preference when there is more equity involved.
Finally, homeowners can have the option of cancelling impound accounts at some point in the future with conventional loans. With VA, FHA and USDA loans, there are no such options, impound accounts are required for the life of the loan. In order to cancel impound accounts with a government-backed loan, the existing loan must be refinanced into a conventional mortgage yielding sufficient equity to allow for the cancellation of impound accounts.
Like many other aspects of a conventional loan, lenders can have different protocols when it comes to impound cancellation guidelines. If you think you are eligible to have impound accounts cancelled, you’ll want to contact your lender and get the proper information on their process for impound account removal.