When your clients buy a new home, chances are they’ll be required to have an escrow account after the transaction is completed. Note that this is distinct from the escrow firm you work with during the transaction, which collects your clients’ documents and funds prior to the actual sale. With the following information, you’ll be able to explain to your clients what an escrow account is and whether or not they need one.
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What is an Escrow Account?
According to Bankrate, an escrow account (also referred to as an “impound account”) is a type of holding account that’s managed by a mortgage lender. Instead of paying property tax and homeowners insurance bills separately, your clients pay them into the escrow account as a part of their monthly mortgage payment. This arrangement ensures that those bills are always paid on time — by the mortgage lender — and helps them avoid situations that could lead to a lien being placed on their property.
Because both property tax assessments and insurance premiums can fluctuate over time, the amount of money in the account can be different from year to year. If they don’t have sufficient money in the account, the mortgage lender usually temporarily covers the difference, notifies them of the situation and increases their monthly mortgage payment. Moreover, the lender is required to send them an annual escrow statement that shows all their payments and the balance on the account.
When Do Your Clients Need an Escrow Account?
Nolo reports that many different lending institutions require an account for the following types of loans:
- Conventional loans: If your clients bought their home with less than 20 percent down, their mortgage lender will almost certainly require an escrow account.
- High-cost loans: If your clients have a higher-priced mortgage that’s based on higher levels than those determined by the Consumer Financial Protection Bureau, lenders will generally collect monthly escrow payments for the first five years of the loan or longer.
- Federal Housing Administration loans: FHA-insured loans always require escrow accounts.
- Veterans Administration loans: While the VA doesn’t actually require escrow accounts, it does require that lenders make sure property taxes are paid and properties are covered by sufficient insurance. Because of this, most VA lenders require escrow accounts.
Should Your Clients Try to Remove Their Account?
It’s possible to remove an account, so long as your clients meet the lender’s requirements. Oftentimes, lenders want the loan to be at least 12 months old with all payments having been made on time. However, it’s wise to consider the advantages of an escrow account before asking a lender to cancel it:
- An account ensures your clients put the money aside to cover their tax and insurance bills.
- The mortgage lender that manages the escrow account is responsible for paying the insurance and taxes.
- Without an account, the lender may require your clients to provide proof of payment, which could require a significant amount of effort on their part.
In other words, using the escrow account can simply be convenient. For more information about escrow accounts, please contact us today.