Is an impound account required with a VA loan in California? That is a fairly common question once we get past the initial question, “What is an Impound Account?” There are only a few loan programs available to borrowers that require little to no down payment for a home loan. Since these borrowers are considered a higher risk to lenders, an Impound account is required as part of the loan. An Impound account, which is also known as an escrow account, is essentially a savings account that is held by the lender (or loan servicing company, which in many cases is a third party) on the VA loan borrowers behalf.
When the California Veteran makes a payment, the payment is not just Principal and Interest. It is also 1/12 of the annual property taxes and homeowners insurance. In California, any mortgage loan with less than a 10% down payment will require an impound account. (Many states require a 20% down payment to avoid an impound account). While VA does not have a specific requirement regarding when to have an impound account, most VA lenders do require it. Most VA loans initially have a down payment of less than 10%, so it would be required in California regardless. However, I have had some VA clients who were able to waive the impound account requirement when they had a large down payment (20% or more down). It is rare and is on a case by case basis. Even though a third party manages the impound account, you are still responsible for the property taxes and homeowners insurance payments. It is very important to monitor the impound account. Here in California, impound accounts do accumulate interest that is paid to the borrower. But don’t expect to be cashing in heavily because the interest rate is very low. (like your savings account)
An Impound Account Helps the Veteran Budget their Cashflow
Nobody wants a big surprise 6 months after they buy their home. By having an impound account that you are paying into each month, you should not need to worry about needing funds to pay that property tax or insurance bills when they comes due. The goal of an impound account is to help ensure that VA loan borrowers stay current on property taxes and Homeowner’s insurance.
Supplemental Tax Bills are not Paid from the Impound Account
The Supplemental tax bill is something that can be a big surprise. While the Supplemental tax bill affects all new home buyers, California VA loan borrowers need to be especially aware of the Supplemental Tax bill and why they are receiving it. The Supplemental Bill only comes in the 1st year after the closing of a home purchase and is the “catch up” tax bill that covers the difference between the previous owner’s tax bill and the buyer’s tax bill (since the previous owners assessed value is normally less than the buyers assessed value). The Supplemental bill is not automatically paid from the impound account like the normal secured property tax bill. The borrower needs to make sure the bill gets paid by either paying it on their own, or forwarding to the loan servicing company and having an impound account review completed. If the loan servicing company determines there are enough funds to cover the Supplemental tax bill then they (the servicing company) may pay it.
Your impound account balance will likely be shown on your monthly mortgage statement. It should be relatively simple to monitor the balance of your account. It is required that the lender reviews the account annually to ensure that you are paying the right amount each month and make any necessary adjustments. The lender does not want to come up short and also is not allowed to have too much money in the account.
Why Did my Impound/Escrow Payment Increase?
While the Principal and Interest portion of your VA loan payment is fixed (if you have a fixed rate), the impound account portion of your payment is not fixed. This is because property taxes go up each year. In California, your property’s assessed value can only increase a maximum of 2% each year as a result of Proposition 13, a bill that passed in 1978. Even if your property value increases 10% in a year, your assessed value is held down by Prop 13. This is a good thing because it helps to keep your mortgage payment, or full PITI payment, stable. It does go up, but not much.
It is very important to understand how your mortgage payment is calculated. The full Principal, Interest, taxes, and insurance. And that is why it can be very helpful to have a California VA Loan officer prepare custom VA loan scenarios for you.
Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.