Home buyers in Orange County, CA need to know how a property taxes and insurance impound account works on an FHA loan. An impound account for property taxes and home owners insurance is required on FHA and VA loans. An impound account, also known as an “escrow account”, is essentially a forced savings account held by the lender on the FHA or VA borrowers behalf.
The Amount Collected for Property Taxes Depends on the Month the FHA Loan Closes
Property taxes in California are paid twice a year, in 2 six month installments. The first half taxes are due on February 1 of each year and cover July 1 through December 31. Second half taxes are due February 1 and cover January 1 through June 30. The amount collected at closing to set up the new impound account is dependent on the First Payment date shown on the loan documents. For example, a loan closing in the month of August, lets say August 30, would have a First Payment date of October 1. According to the chart shown below, loans with a First Payment on October 1 should have 8 months taxes deposited into the impound account.
Since the purpose of the impound account is to make sure property taxes are paid in a timely manner, the lender needs to make sure there is enough money in the account when taxes are due. If we assume a loan closes on August 30 and will have an October 1 first payment, then the lender needs to make sure there is enough money in the account only 30 days after the first payment to cover the first half tax installment, due November 1. But the lender will also need to make sure enough funds will be in the account three months later to cover the second half installment. Impound accounts are regulated by law and lenders are allowed to have up to a two month “cushion” to help prevent a shortage of funds in the account.
This all sounds confusing, but is necessary in order to keep the borrower from getting a surprise when property taxes are due. (The surprise may still come in the way of “supplemental property taxes” in the first year after a purchase.)
Home Owners Insurance is also deposited to the impound account. At closing a one year premium is paid, but the equivalent of two months property taxes is also deposited into the impound account. This ensures there will, or should, be enough money in the account 1 year later to renew the insurance.
Orange County FHA Buyers Need to Budget for the Impound Account
Orange County home buyers using FHA or VA financing need to budget for the funds required for the impound account. Both FHA and VA guidelines allow for the seller to pay for the set up of the impound account, which can be the best solution for Orange County home buyers who have saved for the down payment but not closing costs.
It is important to contact an Orange County FHA or VA lender who can prepare customized loan scenarios which will show estimates for not only the amount of funds required to buy a home, but also will give a full breakdown of the purchase price, loan amount, and payment.
Authored by Tim Storm, an Orange County, CA FHA and VA Loan Officer – Please contact my office at Home Point Financial for more information about an Orange County, CA home loan. 949-829-1846.
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949-829-1846| tstorm (at) ochomebuyerloans.com