In my continuing series of answering some of the most frequently asked questions that I get from clients and prospects, in Part 6, I want to discuss what impound accounts are and why some borrowers may or may not need to have them in order to close their loan. I will also discuss why some borrowers may want to have them even if they don't have to.
An impounds account (aka escrow acct) is simply an account that lenders use to pay a homeowners property taxes and insurance (mortgage & hazard). At the close of escrow and every month thereafter, a lender will collect funds that make up a portion of the annual property taxes and insurance that is needed for the homeowner to own their home. These funds are kept by the lender and are used to pay the homeowners property taxes (paid bi-annually), hazard insurance (paid annually) and the monthly mortgage insurance.
Some conventional loan products may require an impound account in order to fund the loan depending on the loan-to-value of the loan amount. Furthermore, some may also charge extra to those borrowers who choose to waive an impound account. Government insured loans like FHA and VA will also require impound accounts regardless of what the ltv is. With some loan programs, once your loan balance reaches a certain ltv, you can request to have your impound account canceled.
At the close of escrow (COE), your lender will require that at least 12 months of hazard insurance be paid for or collected before funding the loan. Your lender will also collect at least two months of mortgage insurance and property taxes. In CA, lenders are required to keep a borrowers impounds in an interest-bearing account and the interest earned on the account belongs to the borrower, not the lender.
One of the benefits of having an impound account is that you can budget your taxes and insurance over a period of time, which is something I have always recommended to my first time buyers. First timers are not in the habit of paying taxes and insurance so having their lender help them budget for them is a good thing. For my more mature and seasoned home buyers, they may not need any supervision in making sure their taxes and insurance are paid, they can set aside their own funds in their own interest bearing account and pay their own taxes and insurance when they're due.
One of the first things that many homeowners get confused about is when their monthly bill increases and they automatically assume that it's their loan payment that has gone up. If you have a fixed rate mortgage (FRM), it's not the loan payment that went up, it's your impound account amount that went up.
Here in CA, when a homebuyer closes escrow, their lender will estimate the property taxes based on 1.25% of the sales price and depending on the county, there may be some additional taxes. For example, here in Ventura county, a portion of our property taxes goes toward the unified school board and community college board but also to water board as well.
I will often have clients ask me why they received a supplemental tax bill after they close escrow. This is because your home was reassessed at a higher value than what the previous owners were assessed at. However, if your home gets assessed at a lower value than what the previous owners were assessed at, you would not receive a supplemental bill.
Furthermore, for some low income homebuyers who purchase their home through a county or city bond program (i.e. down payment assistance (dpa) program), they become eligible for a special discounted property tax rate that is specifically for affordable housing properties. Instead of the standard tax rate of 1.25% of the sales price, these homeowners are assessed at only 1% of the affordable sales price (sale price - dpa). You will need to check with your county tax board to see if you are eligible for this program. For example, Ventura county participates in this program but Los Angeles county doesn't so it does depend on the county.
Ventura county is considered a high cost county and as such many of those who work here in Ventura county can not afford to live here therefore, many of them are commuting quite a way to just work. Now, with the various affordable homeownership programs, the dream of homeownership becomes a reality for many of Ventura county's employees and residents who would never be able to own a home any other way.
Buying a home is one of the most important decisions someone can make, which is why it's important to get as much information as possible before starting your search. Furthermore, it's absolutely vital that buyers work with a seasoned MLO and lender that that will work with them in helping them to decide what is best for them and their mortgage needs.
That's what I'm here for and I would love to be able to assist you in your search for an affordable home loan. If you have any questions and/or concerns, please feel free to contact me, Donne Knudsen at 805.2069123 or firstname.lastname@example.org.