The Real Estate Encyclopedia
How Does An Impound Account Work?
Category - Home Buying Questions - General Home Buying FAQ's
With an Impound Account or Escrow Account, money is usually collected at closing to fund the account to cover property tax and insurance bills. Ongoing payments are collected from the borrower as part of the monthly mortgage payment. The borrower receives interest on the money in the account. The lender pays the yearly property tax and insurance bills.

The lender is required to submit an escrow statement to the borrower on a yearly basis and to refund any excessive funds collected in the account. The lender is also required to share with the buyer the way the impound account works.

Typically, a lender requires an impound account on an owner-occupied mortgage if the loan amount is for 90 percent or more of the purchase price. On non-owner occupied mortgages for investment properties, the lender can require an impound account even if the loan amount is less than 90 percent of the purchase price.

To avoid an impound account, you can raise your down payment above 10%. Keep in mind, though that without an impound account you will be responsible for yearly property tax and insurance payments. By agreeing to the impound account, the property tax and insurance payment is contributed monthly and paid by the lender.

An impound account can usually be dropped on an owner-occupied loan once you have 20 percent equity in the property. Also, your payments will have to be current and you will need a good record of making payments on time. Contact your lender if you meet these requirements and want to drop your impound account.

Even if you have an impound account, you are responsible to check your insurance and property tax statements and make sure the lender has made the yearly payment. Lenders sometimes make mistakes. Check the statements you receive from your lender to confirm that your bills are paid on time. The lender should be responsible for penalties if the lender makes an error and your property taxes or insurance bills are not paid on time.

Also, keep in mind that loans are frequently sold. Loan servicing may or not be sold with the loan. If the servicing is sold to a new company, make sure the new company has an accurate record of your impound account balance.

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Home Buying Questions - General Home Buying FAQ's
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