What is an impound escrow account?
An impound escrow account is set up for a real estate mortgage loan to pay certain property-related expenses such as private mortgage insurance, homeowner’s insurance and property taxes. Frequently, lenders require these impounds to be paid with the borrower’s monthly loan payment. Often, loan regulations require impounds to be set up for a mortgage loan collateralized by a personal residence. Escrow accounts are far from simple as they may be required or restricted by an array of state and federal laws and regulations. Generally, there is a legal instrument that places a lien on the homeowner’s property, such as a deed of trust or mortgage, that requires reserves or impounds for property taxes and insurance.
An escrow agent acting as a loan servicer sets aside the monthly impound payment in a separate account in order to pay annual expenses, such as taxes and insurance. An annual escrow analysis is required under the Real Estate Settlement Procedures Act (RESPA). The escrow agent will calculate an annual escrow analysis to determine if there is any deficiency or surplus in the escrow account. Upon completing an escrow account analysis, the escrow agent must prepare and submit an annual escrow account statement to the borrower.
Why do lenders use escrow accounts?
From a lender's perspective, the purpose of having an escrow account is to make sure the property taxes and homeowner’s insurance get paid on time every year to prevent any risk to their investment.
If homeowner's insurance isn't paid, the lender could have trouble recouping their investment in the event of a fire or other disaster. If the property taxes aren't paid, the state or local government could assess fines or even place a lien on the home. If property insurance is not purchased, a lender will purchase a policy that is typically more expensive than regular homeowner’s property insurance. This insurance serves to protect the lender in the event of damage to the property.
Why do borrowers use escrow accounts?
From a borrower’s perspective, the large annual expenses of taxes and insurance are broken down into manageable monthly payments. Additionally, impound escrows place the responsibility of timely insurance and property tax payments on the escrow servicer. Yearly, the escrow servicer will send out tax reports for interest and taxes paid as part of their loan servicing reporting.
Whether you are lending the money or spending the money, having a reputable escrow company set up an impound escrow as a component of your mortgage loan makes the process easier and more secure.