Prepaids and Impounds in the Closing Disclosure (CD) are two of the most confusing sections. Section F (Prepaids) and Section G (Initial Escrow Payment at Closing). These sections can be found under “Other costs.”
UNDERSTANDING THE PREPARES IN SECTION F ON CLOSING DISCLOSURE
01-Homeowner’s insurance premium – If the mortgage is to purchase a home, you will need to pay 12 monthly premiums at closing. You will only have to pay this if your insurance is valid for up to 60 days at the conclusion.
02: Mortgage Insurance Premium. Most mortgage premiums are paid monthly with your regular mortgage payment. It should make it $0. If you spend a lump sum for your mortgage insurance, this will be added to the cost.
03 Prepaid Interest This category covers interest from your loan between the closing date and the month’s end. You would usually skip the monthly payment after closing your loan. If you complete the loan by April 15, you will be responsible for 16 days of interest (see screenshot above), but you will only have to make a mortgage payment in May. The first mortgage payment is due June 1.
04 Property Taxes You would only pay this if your property taxes are due. Not all property taxes are due at once. California’s first installment of taxes is due October 1, but it can be paid up until December 10 without penalty. For any loan closing after October 1. If sellers have paid taxes after the closing date, they may still owe you. If you close on April 15, but the sellers have not paid their taxes until June 30, you will need to reimburse them for the prorated tax payments from April 15 through June 30.
UNDERSTANDING INITIAL ESCROW (IMPOUNDS). PAYMENT IN SECTION GH ON THE CLOSING.
Here is where things get complicated. Before we can calculate how many months of reserves are required for an Escrow account (also known as impound), let’s first define an impound account.
According to Consumer Finacial Protection Bureau
Your mortgage lender may also call this an impound account. It is used to pay property-related expenses. A portion of your monthly mortgage payments goes to the account. These expenses can be paid through an escrow account. You send money to your servicer or lender every month instead of paying a hefty bill only once or twice a calendar year.
Many lenders require you to pay your taxes and insurance with escrow to ensure the bill is paid. The escrow account will be managed by your mortgage servicer, who will pay the bills. Sometimes, escrow accounts are required by law.
Let’s take a look at it. Let’s look at Texas, where taxes are due each year.
The formula for Property Taxes is
A+B-C
A = Total Number of Months in the Year (This number is always 12).
B = Total Number of Months of Reserves. It is always two and required by federal mortgage guidelines. Lenders must always have two more months of reserves than they need. If they are required to pay 12 months’ worth of taxes, they will need 14 months. It is to protect the lender in case of a missed payment by the borrower.
C = Total Number of Months Between the 1st Mortgage Payment Due Date and the Next Tax Instalment Due Date
If you close a Texas loan on April 15 and the next installment is due December 1, you will have paid seven months of your mortgage payment before December 1 (June-November).
The formula below is 12 (A)+2(B) + 6 (C), which equals eight months of property taxes that will be collected at closing.
You would then pay seven months upfront plus seven monthly payments to the lender so that they have the required 14-month payment by December 1. The lender would pay 12 monthly tax payments to the county. 2 months of additional reserves will remain in your escrow account.
Homeowner’s insurance is the same as
A = Total Number of Months in the Year (This number is always 12).
B = Total Number of Months of Reserves (This number is always 2)
C = Total Number of Months Between the 1st Mortgage Payment & Next Insurance Renewal Date
If you refinance a loan in Texas on April 15 and your next insurance renewal date falls on January 1, you will have paid eight months of your mortgage payment before December 1 (June-December).
The formula below = 12 (A),+2 (B), 7 (C), = seven months of Homeowner’s Insurance. It will be collected at closing.
You would then pay six months upfront plus eight monthly payments to the lender so that they have the required 14-month payment by January 1. The lender would pay 12 monthly insurance premiums to your homeowner’s insurer company. 2 months of additional reserves will remain in your escrow account. These will be shown on your mortgage statement.
Flood Insurance:
Flood zone property means the premium must be impounded, even though taxes and homeowner’s insurance premiums are not. The flood insurance premium is usually impounded for two months.
We hope you found this helpful in understanding how the prepaid, impound numbers, and loan estimate is calculated for closing disclosure (CD) and loan estimate (LE).
If you’re looking for general information, this post by Porch provides advice on the entire mortgage process. It covers everything from underwriting to mortgage insurance and offers top tips for finding the right lender.