Why won't lenders let me pay my own property taxes?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I am buying a property and am having a problem with the lenders I speak to. They all want me to come up with huge amounts upfront! This is not for my mortgage fees or my down payment; it's for property taxes that are not yet due. Why should I have to pay my property taxes to the lender? I never had to do this before. - Dave, Colorado Springs, Colo.

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Dear Dave,

The amounts your new lenders want you to pay are called escrows or impounds. Most lenders require that you pay into (or "load") an impound account when you finance a home. This may amount to a couple of quarterly tax installments and up to 14 months of insurance premiums. In addition, the lenders add amounts to your monthly payment for property taxes, homeowners insurance and sometimes other items. Then the lender pays the installments when they come due.

Why are impounds required?

Why doesn't the lender just mind its own business and let you pay your own bills? Because it's riskier. If you let your property taxes or insurance go, the lender may have no collateral to secure its interest. If your home burned down uninsured, you might not be able to rebuild the home and continue to pay the mortgage. If you default on the taxes, the county might put a lien on your home or take it and sell it. So the lender can keep the risk to a minimum by taking care of such payments itself.

Why impounds aren't always part of the mortgage

Lenders don't always require impounds. If you have more than 20 percent in home equity or more than 20 percent for a down payment, impounds aren't usually required. However, the lender may assess a fee (generally 0.25 percent of the loan amount) to issue a waiver.

In addition, bad credit mortgage lenders don't generally require impounds -- probably because they don't choose to deal with the administration of the funds. So if your previous mortgage was a mortgage for bad credit or subprime home loan, you might not have had to have taxes and insurance escrowed.

Accounting for impounds when calculating mortgage payments

Even if you don't have to have impounds on your next home loan, understand that these ongoing expenses are required and need to be accounted for. Financing a home means paying for your principal, interest, taxes, insurance and other expenses such as mortgage insurance, flood insurance, homeowners association dues and special assessments.

Mortgage calculators do not always include these extra items, so it may be better to ask a loan agent to calculate all of these amounts for you when shopping for a home loan. That way you will get a more accurate picture of what payments you'll have to make related to owning your home.

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