Impound accounts, sometimes referred to as Escrow accounts in various 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 closer look at these accounts and what they accomplish.
Mortgage lenders need to make sure property taxes are paid. That’s pretty simple. 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.
To provide an additional degree of protection, impound accounts are set up. With an impound account, as each mortgage payment is made, so 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 separate accounts. 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.
Impound accounts can be required or optional. Loans that require impound accounts are government-backed mortgages. Government backed mortgages are VA, FHA and USDA programs. For loans where the first mortgage balance represents more than 80% of the sales price of the home, impound accounts are required. These are not optional for the borrower. Individual states may also impose additional standards. For loan amounts that are less than 80% of the value, 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.
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.
