Impound accounts explained: Why your servicer holds funds

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Figuring out where all of your money will go when you buy a home can be confusing, especially when you’re told your funds will be held in an impound account.

Impound accounts go by different names depending on where you live, and the lender sets them up to cover property-related expenses. Sometimes, mortgage lenders require you to pay taxes and insurance through an impound account managed by your servicer, the company you make your payment to each month.

This article covers why your servicer is holding funds, how impound accounts – also called escrow accounts – work, and whether they’re required before you can close on your home. Let’s start at the most basic level: What is an impound account?

Key takeaways:

• An impound account, also called an escrow account, holds part of your monthly mortgage payment for property-related expenses like taxes and insurance.
• Your mortgage escrow account can help you avoid large annual bills, but your monthly payment can change if property taxes or insurance premiums change.
• Whether escrow is mandatory depends on your loan type, lender, servicer, state laws, and loan qualifications.

What is an impound account?

The impound account meaning and escrow account meaning are essentially the same. An impound account holds your funds to pay for real estate expenses outside of a mortgage, such as property taxes and homeowners insurance. You may also hear this called home insurance escrow when the account is used to hold funds for your homeowners insurance premium.

Here’s how it works: Part of your monthly mortgage payment goes toward escrow or impound costs. Your servicer sets aside the portion meant for taxes and insurance, then uses the account to pay those bills when they come due. It isn’t an account you have to manage yourself because your servicer controls it.

However, this doesn’t mean you can ignore this account. If your insurance premiums or taxes increase, you could end up with a shortage. If there’s a shortage, you’ll be responsible for paying the difference.

Are impound accounts mandatory?

The type of loan product you choose influences whether you’ll need an impound account. Some government-backed loans, such as Federal Housing Administration (FHA) loans, require an impound account.¹ U.S. Department of Agriculture (USDA) loans generally require escrow unless an exception applies.

As you’ll see, the rules for a conventional mortgage or VA loan are a little more flexible.²

Rocket Mortgage doesn’t offer USDA loans at this time.

When are impound accounts not required?

It’s possible to get an escrow waiver on a conventional mortgage or a VA loan. These are the policies of Rocket Mortgage.

For conventional mortgages, you just need to qualify for the loan option. This means meeting minimum credit and debt-to-income ratio (DTI) requirements, like having a credit score of at least 580 if you’re taking cash out. To remove an escrow account on a VA loan, you have to qualify and have a minimum credit score of at least 620.

The requirements are a little different if you’re looking to remove an escrow account after your loan has closed. In this case, there are requirements based on your past payment history, like a limit on the number of late payments. You also can’t have missed tax payments or have had force-placed homeowners insurance. Finally, escrow can’t be removed within 45 days of a tax payment.

Sometimes there’s a waiting period. Higher-priced mortgage loans have to have escrow accounts for 5 years.

Finally, if you don’t have an escrow account, you need a game plan to set aside the funds for property taxes and homeowners insurance to make the payments in a lump sum on your own.

What are the pros and cons of impound accounts in real estate?

The main advantage of using an impound account is that it minimizes the risk of missing property payments due to unforeseen expenses like medical bills, car repairs, etc. But beware of getting complacent with your insurance rates – it’s easy to lose track of them since they’re automatic.

The pros

• You could get a discount. You may be eligible for a discount if your property taxes are paid by a certain date in some areas. Where discounts apply, we pay by this deadline so you can take advantage of the savings.
• Your servicer is responsible for making the payments. Your servicer will automatically make your homeowners insurance and property tax payments on time.
• Your monthly amount is automatically set. The monthly amount you’ll need for your taxes and insurance is automatically added to the monthly principal and interest mortgage payment. This is typically part of PITI, which stands for principal, interest, taxes, and insurance. You should look at your impound disclosure statement every year to see if there are any changes.
• There are no large annual payments. Impound accounts make it easier for you to plan and budget for your ownership responsibilities by collecting the money each month, rather than having a single large annual payment.

The cons

• It’s easy not to review your insurance. Since your payments are coming out automatically, it’s easy to forget to check your insurance rates on an annual or semiannual basis.
• Your estimate could be incorrect. When your servicer sets aside money in an impound account for your property taxes and homeowners insurance, there’s always a possibility that they could be withholding too much or too little to cover the costs of these expenses.
• Your monthly payment could change each year. If you end up with a shortage in your impound account, your monthly mortgage payments may increase to cover the difference. If you end up with a surplus, your payment could potentially decrease so that you’re not paying more than necessary.

Do I need to do anything to manage my impound account?

You don’t need to do much to manage your impound account, and your mortgage servicer will handle your impound account for you. Your mortgage statement will probably show the balance in your impound account, making it easy for you to keep track of it.

Federal regulations also help borrowers out by requiring servicers to review escrow accounts annually to ensure that the correct amount of money is being collected. If too little money is collected, the servicer will ask for more. If too much is in your account, you’ll get an escrow refund.

Can I run out of funds in my impound account?

Yes, your impound or escrow account can come up short. It usually happens when costs change. Even with a fixed-rate home loan, insurance premiums and property taxes can vary from year to year.

If your account comes up short, your servicer will usually cover the payment so the bill is paid on time, then increase future bills to make up for the escrow shortage. You may also be able to pay the shortage in one lump sum, depending on the options your servicer offers.

You can also review your homeowners insurance options. If you find less-expensive coverage that still meets your lender’s requirements, it could lower the annual amount needed in your impound account.

The bottom line: Expect insurance and taxes with or without an impound account

Your impound account is a safe place to store your money until it’s needed for property taxes, homeowners insurance premiums, and other expenses during the year.

Even if you don’t have an impound account, you’re still responsible for paying homeowners insurance, property taxes, and other home-related expenses outside of your mortgage. If you don’t pay your taxes or insurance, your servicer may add an escrow account to your loan to protect the lender’s investment.

When you’re ready to take the next step, apply online with Rocket Mortgage.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage LLC or its affiliates.