How does a lender calculate the amount for an impound account? It’s a common question that we often hear from home buyers. So let’s go back one step. If you aren’t familiar with the escrow impound account, here’s a quick overview.
What is an Impound Account?
It is an account set up and managed by a mortgage lender to pay property taxes and insurance for a home buyer to ensure that both are paid in full and on time.
While many believe that the escrow company manages the impound account, the impound account is actually managed by the lender, and here is how it affects the closing:
- Upon receipt of loan documents, the lender will include instructions on amounts to collect at closing to the settlement agent.
- The amounts the lender requires will appear on the estimate the borrower signs with loan documents.
Think of an escrow impound account as a savings account held in trust by your lender to pay the property tax and insurance bills as they come due.
Now, let’s talk more about how the lender actually calculates the amount for the impound account.
When homebuyers sign loan documents, they are presented with an estimated settlement statement from their escrow holder. On this statement, there is the initial amount that the lender will collect to set up the Escrow Impound Account. It can often feel like they are paying months of taxes before they ever take possession of the home for home buyers.
But remember, think of the impound account like a savings account where the funds are used to pay for property taxes and insurance. The lender will require the buyer to pay a monthly amount equal to 1/12th of the annual property taxes and yearly insurance premiums. To calculate the annual property taxes, the lender multiplies the home’s purchase price by 1.25%. The annual insurance premium is a fixed amount determined by the buyer’s insurance agent and given to the lender as a condition of the loan.
How Are the Funds Allocated?
In the State of California, property tax bills are issued twice per year. The tax bills are mailed out in October, and the first half of taxes (covering July 1-December 31) are due November 1st. The second half of the taxes (covering January 1-June 30) are due February 1st.
For insurance, the lender will usually require that one full year of insurance be paid in advance through escrow when the account is set up. They will also collect an additional two to three months upfront for the impound account to cover the next premium due one year from the close of escrow.
Most lenders will require an amount equal to two months of reserves to remain in the impound account at all times for both annual property taxes and insurance. They calculate this by how many monthly mortgage payments the buyer will have made when the bill comes due to determine how much they will collect upfront.
Let’s look at a few examples:
Escrow Closes August 20th
In this example, the buyer’s first payment to the lender will be due on October 1st. The payment will cover taxes from July 1st through December 31st. To ensure they have enough funds in the impound account, they will collect at least eight months of taxes upfront from the buyer through the Escrow Impound Account.
While it may seem like the buyer is paying for taxes when they are not the property owner, keep in mind that the buyer will receive a credit for taxes from July 1st to August 20th through the escrow in this example.
Escrow Closes February 15th
Here, the buyer’s first payment will be due on April 1st. The lender will make the first payment to the Tax Collector in this instance for the property taxes covering November 1st-December 10th.
This payment will cover the taxes from July 1st-December 31st, the second half of the year. The lender will have received at least six monthly mortgage payments (including the impound amounts) from the buyer, meaning they would only need to collect 2-3 months upfront from the buyer in the Escrow Impound Account.
We hope that you found this information helpful! If you have any questions, want to learn more about our services, or are ready to open escrow, please get in touch. Our team is here to support you!