Problems with Impound Accounts
Hapy Friday! Today, I would like to go over some of the problems clients have faced in the past regarding their impound accounts. No one likes receiving their property tax and home insurance bills and being shocked by them, then angry that there is no money anywhere to pay the two. This is easily avoided, of course, by having your mortgage company take a little bit every month with your mortgage payment and then pay those two charges when you are billed for them.
On the face of it, it’s a perfect plan. Mortgage companies are required to give you the option of having an impound or not, and frankly, some of them feel more comfortable if they do. That way, they know they have a reserve and that you are not going to default on either your property taxes or home insurance, both of which the lender sees as a problem that directly affects them. However, impound accounts are far from perfect. It is necessary to be vigilant if you are a first time homebuyer and of course even if you are not.
Ensure the Bills are Paid
Many times, information just doesn’t get processed right. The insurance company sends you the bill, even though you have informed them that you have an impound account. Or vice versa. Either way, it is still your responsibility to follow up with both companies (insurance and mortgage) and make sure that the billing and payment gets handled properly. Even if the mortgage company says that the payment has been paid, call the insurance company and confirm. I once had an incident happen (to me, nonetheless!) where the mortgage company had sent the payment but the account number was incorrect. Meanwhile, the home insurance company was billing me. Well, many faxes and phone calls later, it was set right.
This is important enough that you take time off from work. That was driven home to me when the forest fires got close enough that I called insurance and made sure it was still valid. Never again will I rely on someone else to do a job I’m responsible for!
The Impound Might Send You a Check…
…but do not spend it! Cash it and keep it in reserve. A few months later, they’ll say that your account is short and you have to cover the difference. There is a reason this occurs: sometimes the property taxes paid by the person to who owned the home before you are much, much lower than you owe. That’s because property taxes get reassessed during a transfer of ownership. This can take a while. Meanwhile, during the mortgage company’s impound account audit, they look at the amount of property taxes on record (low) and how much they have held for your payments (high). That number will soon be revised, but for now, they are not allowed to hold more than a certain amount and so are required to send the money back. Even if your mortgage broker had the number right. So, don’t spend the money! Cash the check and save it. You’ll be glad you did.
However, it is Nice When Things Go Well!
Sometimes, however you do end up paying a lot more unfront when you buy the home, thanks to reserve requirements which some lenders insist on. This is a good thing. Remember the new property tax assessment I just spoke about? That creates a supplemental tax bill. The supplemental tax bill is the difference between what the previous owner paid and what you are to pay for the time in the tax year you moved into the home. That’s when you’re glad the lender had the reserve requirements.
You can call the mortgage company and see if they have more money in the impound account than you will need in the year. They can do the calculations for you. Taxes are usually roughly 1.125% of the transfer price. Add insurance and most mortgage brokers will use the 1.25% formula to calculate your mortgage payment. If the amount in the impound is indeed more than will be required for the year, you can go ahead and fax them the supplemental tax bill(s) as well and have them paid. That’s when you’re really happy with the lender for requiring reserves!
I guess all this means that you have to be vigilant. I know many home buyers like to have an impound account because they’re not good at setting money aside every month to cover expenses like home insurance and property taxes, but if anything goes awry, most companies (and definitely the county your taxes go to) will hold you accountable. Even if it’s a genuine error on the part of the mortgage company. So keep a tab on it and the impound account can be quite a boon!
