18 Nov Impound Accounts – Explaining the Calculation
At the time of signing loan documents, the buyer is presented with an estimated settlement statement by their escrow holder. This statement includes the initial amount the lender will collect in order to establish the Impound Account. This amount often brings up questions from the buyer, as it sometimes appears that they are paying for months of taxes before they are the owner of the property. In this blog, we explain how a lender calculates the initial amount they request from the buyer through the close of escrow.
In our previous blog, “Escrow Impound Accounts Explained”, we explained that the Impound Account, also known as and Escrow Impound Account, is originated and managed by the mortgage lender. The buyer will be required to pay a monthly amount equal to 1/12th of the amount of the annual property taxes as well as 1/12th of the amount of the yearly insurance premium for the property. To calculate the amount of yearly property taxes, the lender multiplies the purchase price by 1.25%. The yearly insurance premium is determined by the buyer’s insurance agent and provided to the lender as a condition of the loan.
TAXES: Property Taxes in California are billed once a year and are payable in two parts. The Tax bills are sent out by October each year. The first half taxes are due November 1st and the second half is due February 1st. The first half taxes cover July 1st through December 31st and the second half taxes cover January 1st through June 30th.
INSURANCE: The lender requires that one full year of insurance be paid in advance and through the escrow during the time the account is set up. The lender will also collect an additional 2-3 months upfront for the Impound Account, as the next premium will not become due until 12 months from the close of the escrow.
The lender usually requires an amount equal to a two months reserves to remain in the Impound Account at all times for both property taxes and insurance. Depending on how many monthly mortgage payments the buyer would have made at the time the bill will be due, will determine how many months the lender would need to collect upfront from the buyer.
Example 1: If the escrow is closing on August 20th, the buyer’s first payment to the lender will be due on October 1st. This payment of taxes will cover taxes from July 1st through December 31st. In order for the lender to have sufficient funds in the Impound Account, they must collect at least eight months of taxes up front from the buyer through the escrow at the time of set up. (This may seem that the buyer is paying for taxes for a time period prior to their ownership of the property, but remember that the seller would have given the buyer a credit for taxes from July 1st to August 20th through the escrow.)
Example 2: If the escrow closes February 15th, the buyer’s first payment will be due April 1st. The lender will make the first payment to the Tax Collector for property taxes between November 1st and December 10th. This payment of taxes will cover taxes from July 1st through December 31st. As the lender would have received at least six monthly mortgage payments, including monthly impound amounts, from the buyer at this time, then the lender would only need to collect 2 to 3 months upfront from the buyer through the escrow.