Impound Account

Interested in buying a new property? You’ll likely run into a type of account known as an impound account. These accounts, held by a neutral third party, ensure all players in the transaction uphold their requirements. Read on to learn more about impound accounts.

What Is an Impound Account?

An impound account, also known as an escrow account, is an account owned by a neutral third party known as an escrow agent. The escrow agent’s role is to protect the seller, buyer, and lender’s interests until the sale is finalized.

The impound account holds important documents, funds, and other items related to a property’s sale and purchase. Once the sale is done, the escrow agent distributes the funds and documents in the impound account to the correct parties and closes the account.

How Does an Impound Account Relate to Hard Money Loans?

When hard money loans are secured to purchase a property, an impound account is a necessary part of the process. All players in this transaction put founds and documents into the impound account, including:

Property seller: Places the deed to the property and funds related to the sale in the impound account.
Property buyer: Puts a good-faith deposit into the impound account.
Hard money lender: Puts the loan funds and documents like the promissory note and deed of trust into the impound account.

How an Impound Account Works

The impound account plays a vital role in every property acquisition, coming into play as soon as a seller accepts an offer on their home. The process typically works as follows:

Step 1: Impound account is opened

Typically, once the seller accepts a buyer’s offer, the real estate agent will collect a good faith deposit from the buyer, open an impound account, and place the funds into the account.

Step 2: Documents are submitted

A number of important documents are placed into the impound account by both the seller and the lender, including the deed, promissory note, insurance, and more.

Step 3: Funds are deposited

The lender will then deposit funds for the purchase into the impound account.

Step 4: Impound account is closed

Once the sale is finalized, escrow will deposit the funds and documents from the impound account to various parties and close the impound account.

Real‑World Scenarios

Review this real-world impound account scenario for a deeper understanding of the role they play in hard money transactions.

Hard Money Multifamily Home

A real estate investor purchases a multifamily apartment building using a hard money loan. As soon as the property seller accepts their offer, the real estate agent opens an impound account.

The real estate agent seller places the buyer’s good faith deposit into the impound account and the seller submits the deed to the building. The buyer then arranges for the hard money lender to put their loan funds into the impound account along with other essential documents related to the acquisition.

Once the inspection, final walk through, and other steps are complete, the sale can close. The escrow agent distributes the funds to the property seller, and sends copies of necessary documents to all parties involved.

Impound Account FAQs

What is the difference between an impound account vs an escrow account?

Impound accounts and escrow accounts are the same thing and can be used interchangeably. They’re both referring to a third-party account managed by an escrow agent.

Who owns the money in an impound account?

No one. The money in an impound account is essentially in a trust, of which the escrow agent is the trustee. While they can manage the money, they don’t have a claim to it. They can only use it according to the terms of the escrow agreement.

Are all impound accounts closed once the sale closes?

No, in some cases an impound account will stay open after the sale of a home. If a borrower puts down less than a 20% down payment, their hard money lender may choose to keep their escrow account open after the sale closes. In these cases, the lender will leave a small portion of each loan payment in the escrow account, then use that money to pay taxes and insurance on the collateral property.

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