One of the many terms you’ll hear on the VA loan journey is “impound account.” If this phrase is new to you, you’re not alone — it’s a fresh concept for many first-time borrowers. Civilian and Veteran borrowers both encounter impound accounts, AKA escrow accounts, when taking out loans with little or no down payment.
What is an Impound Account?
An impound account is an account where additional funds are collected each month for the borrower’s benefit used to budget for the property’s insurance and tax payments. Mortgage companies often require these accounts because they want to avoid county tax liens encumbering a property as a result of delinquent property taxes – unpaid taxes by the homeowner. They also want to make sure that the homeowners' insurance policy is always paid current to protect their investment in the loan. Ultimately the escrow impound account achieves the borrower’s goals of budgeting annual property tax and home owner’s insurance expenses, by breaking them down to monthly payments, and this appeases the lender too.
Have some assurance that there is homeowners insurance, in case the property gets damaged. In order to provide this assurance, borrowers pay into an impound account each month, which goes toward annual tax and insurance expenses.
Think of it this way: each month, your loan payment not only goes toward principal and interest but also toward 1/12th of your annual insurance and property taxes. While the VA doesn’t require impound accounts, they are common for VA loans in California, because we’re not aware of any lenders that waive their policy.
Benefits for the Borrower
Impound accounts aren’t just in the interest of lenders; they also provide some notable benefits to borrowers. First off, paying off taxes and fees bit by bit is easier to manage versus being hit with a lump sum every 6 or 12 months. Many borrowers appreciate having consistent monthly payments and budgeting accordingly. In some cases, borrowers will voluntarily request an escrow account in order to meet their budgeting needs.
In California, interest must be paid on escrow/impound accounts. This means that the money you put into the impound account may be worth a bit more when the bills are due. The interest rate is comparable to a checking or savings account, so at least you know that your funds can grow, even in the hands of escrow.
How Much are Impound Account Fees?
There is a limit to how much a lender can require a borrower to pay into an escrow/impound account. The Real Estate Settlement Procedures Act (RESPA) limits monthly impound account payments to 1/12 of the annual taxes and insurance fees, plus a slight cushion. It also requires that lenders perform regular account analysis and let borrowers know of any shortages. On top of that, surplus amounts over $50 must be returned to the borrower.
Even if you have a fixed-rate loan, you may see a change in your impound account payments over time. That’s because property taxes go up each year and homeowner’s insurance premiums can fluctuate. Thanks to California’s Prop 13, your property’s assessed value can only go up by a maximum of 2% each year. This means that even if your property’s street value goes up significantly, your property taxes won’t increase by much.
Your Source for VA Loan Solutions
The team of Veterans helping Veterans at SoCal VA Homes is at-the-ready to answer any questions you may have about impound accounts or any other aspect of VA home loans. In addition, our Veteran Home Buyer Survival Guide can take you step-by-step through the process, so you know just what to look for when you enter the housing market. Ready to get started? Contact us today at (949) 268-7742!