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Property Taxes and Your Mortgage

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Property Taxes and How They Can Affect Your Mortgage

Everyone Pays Property Taxes

The rules and amount vary widely from state to state. In fact, this is usually the main source of local government funding and is generally based upon the home’s value. How these taxes get paid is often a source of confusion to homeowners, particularly first-time homebuyers.

The first question you might ask is why lenders even care about taxes. The reason is that unpaid property taxes are a superior lien to the rights of the lender. If a lender gets the property back through foreclosure, there are almost certainly going to be unpaid property taxes. The lender is going to have to pay. Lenders don’t feel that this is their job, and I don’t blame them.

That’s why almost every loan contains a provision that you will pay the property taxes when due and that the failure to pay the property taxes is an “event of default.” This means that if you are delinquent on taxes, your lender could, theoretically, foreclose on your property even if you have been making all of your mortgage payments on time.

How Would the Lender Know?

You probably don’t remember this, but when you signed your loan documents there was a charge of about $75 for “Tax Service.” This pays for a third-party company whose business it is to go to all the County Offices in the country some period of time after taxes are due and to get a list of all delinquencies. They then notify your lender that you are late! The lenders seldom foreclose based upon your failure to pay taxes, but you can be assured that they will write you a “strongly-worded” letter reminding you of your obligations.

The strange situation is that a far larger number of people than you might believe – I have heard that the number is over 30% in some areas – do not pay their taxes on time. I am fairly certain that a really small number, some fraction of 1%, actually lose their homes because of failure to pay taxes, but that doesn’t mean that lenders don’t care.

Let’s assume that you are a lender that is servicing 3,000,000 loans. (Servicing is the terminology for collecting payments and managing the loan.) Let’s say that only 10% of people don’t pay their taxes the next time they are due. That’s 300,000 letters you’d have to write! The postage alone is $117,000. You’d need a pretty big department to handle that. Not only that, they now have to check to make sure that you paid it when they get your letter saying that you did pay it. Lenders/servicers don’t get paid for that.

Property Taxes as Part of Mortgage Payments

That’s how the idea of the impound account, or escrow account as it’s called in many areas, came up. In order to prevent this costly exercise that they don’t get paid for, an important issue from their perspective, they invented the idea of you paying one-twelfth of your taxes every month along with your regular mortgage payment. Then, when the taxes are due, they send a check to your County Tax Collector. I think that they even save postage because I’m sure that most large counties can now accept electronic funds transfer.

The huge objections to this were always that, “The bank has my money and they don’t pay interest,” and “They keep a lot more than they need.” Many states – I am not sure how many – now pay interest on the impound balances, although it’s not much. Heck, these days you wouldn’t even earn that much if you kept it in a savings account.

The other aspect – how much they are allowed to keep – is now governed by Federal law. They are allowed only a small cushion and are required to calculate the balances and return to you any more than the mandated maximum. In most Eastern states, lenders are used to having these impound accounts and state laws protect their rights to demand that you have one. However, the laws in other states are more consumer-friendly. In California, for example, a lender can require impounds only where the loan is greater than 90% of the value of the home when they did the loan.

It’s not like all aspects of impound accounts are bad. Those Eastern lenders didn’t like it when they came out to California to do loans and were told that they couldn’t have impounds. So they started offering quarter-point pricing incentives. That’s $1,000 reduction in fees on a $400,000 loan. I can guarantee you that it is worth $1,000 to let them do it for you.

Also, many homeowners like the convenience of never having to worry about paying the tax bill. In California, taxes are late if not paid by December 10th – right when you need extra money for Christmas – and April 10th – right when your income taxes are due. Not good timing!

Like most things in life, there are plusses and minuses. I think you have more important things to worry about.

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  • Tammy

    Can I refuse them to add it to loan after 9 years they sent a letter saying they are going to add taxes to payment it raises my pmt 900 a month and I was late on last year 2 pmt due to my husband in hospital with brain cancer

    • Gerri Detweiler

      I am so sorry to hear what your family has been going through. It sounds like what happened was you use to pay your taxes yourself, but then you were late paying your taxes and so your lender is now requiring an escrow account. Is that correct? If so, it is probably permissible. It’s for the lenders protection as well as your own. If the taxes are not collected on time than the property could be at risk. I know that may make it extremely difficult for you to budget, but the taxes do need to get paid one way or another.

      It sounds like your mortgage payment is too high. In that case I would recommend you consider talking with a HUD- approved housing counselor.

      You can also file a complaint against your mortgage servicer with the Consumer Financial Protection Bureau by calling (855) 411-CFPB (2372), but I’m not sure if that will help because I believe the lender’s actions are probably typical in this kind of situation.

      • Jose

        Can i claim property taxes(1098)to my income tax return?

        • Gerri Detweiler

          Jose – Here is IRS information on deducting property taxes.

          • Ed

            Gerri, it is because of advice like yours that people continue to pay property taxes they do not need to pay. check the constitution of your state to ensure that there is no homestead clause. I’m sure you will find one there. People cannot lose their homestead it is sovereign. Please check the law before giving advice. People have been lied to by everyone and so they believe the lie. Most people don’t even know they are actually perpetuate malfeasance of the government. Give people advice that you know is from research and not just hand me down misinformation.

  • Gerri Detweiler

    I know it seems harsh, but if the taxes aren’t paid you will lose your house, and since the bank has the mortgage they are simply trying to protect the money they have lent you. Before you pack up please talk with a HUD housing counselor and a bankruptcy attorney. There may be options so get advice from both. Truly sorry to hear of your difficulties.

  • Credit Experts

    That will depend on so many factors it’s hard to tell you. How long will you stay in Buffalo? Do you know the area well enough to choose a house and neighborhood you will like? How much appreciation is likely? And so forth. In general, it can be a good idea to rent first in a new city and then decide if you want to commit to buying. If you buy and don’t stay long, the transaction costs can make ownership more expensive. It also sounds as if you don’t have much of an emergency fund or down payment, and you’ll want those in place before buying.

  • Gerri Detweiler

    Yes. Your lender performs an annual escrow analysis. At that point it should change, but you can ask them if they can reconsider earlier if there is a change in your tax status.

  • mercedes

    So I pay property taxes included with my mortgage payment. Why do I get a bill saying that I owe the city 1200 dollars

    • Credit Experts

      Check with your mortgage holder to see if that bill has been paid. In some cases you will receive a bill even though your mortgage holder pays it.

  • Gerri Detweiler

    Thanks for your question. We have turned it into an article here: What to Do If Your Bank Doesn’t Pay Your Real Estate Taxes

  • M&T

    My husband and I had bought our first home in the fall of 2011, and were told at closing that the mortgage had been sold to WFHM and we would be making our payments to them. We moved in and began making our monthly mortgage payments. After about three or four months we received a letter from WFHM stating that the home was in a flood zone hazard area and that we would be required to purchase a lender based flood insurance if we didn’t find another that was ‘acceptable’ to them. After reviewing our original loan documents we found that the home was not located in a flood zone, and even went to several local insurance companies that showed us the home was not in a flood zone, so we submitted these documents to WFHM, only to be told that those documents were unacceptable and that we would have to pay to have the flood zone re-assessed. We contacted our loan originator and obtained a copy of the original flood cert. stating that the home was not in a flood zone, and also contacted the original appraiser. They told us that they had made a mistake and the home did reside in a flood zone, but did not find out until 3-4 months after closing. On the advise of the real estate agent that sold us our home, we put the home up for a short sale, at the time we thought we had no other options, and it sold the following year. We didn’t find out until almost two years later, when we tried to obtain another home loan, that the home was on our credit report as a foreclosure and had significantly dropped our credit scores. My question is this; When (if) we are able to qualify for another home loan, is there any way that we can prevent WFHM from buying our new loan?

    • Gerri Detweiler

      The short answer is no, you don’t have control over that process. But in the future, you do have rights when it comes to servicer errors and if something like that occurs again I’d suggest you file a complaint with the Consumer Financial Protection Bureau and get an attorney involved if necessary.

    • Gerri Detweiler

      The short answer is no, you don’t have control over that process. But in the future, you do have rights when it comes to servicer errors and if something like that occurs again I’d suggest you file a complaint with the Consumer Financial Protection Bureau and get an attorney involved if necessary.

  • Curious Lady

    What if my escrow is included in my monthly loan payment but i fail to pay it. Will i be reported as delinquent to the credit bureaus?

    • Gerri Detweiler


  • Elle Davis

    I am buying a house for cash. The seller has not paid the last year taxes. The escrow company mailed documents showing that this year’s taxes have been prorated and it shows as an offset in our paying price. When I asked about the lien at the assessors office for last year, I was told that they were being paid by the title escrow company but because of RESPA laws, it was only showing up on the seller’s side of the HUD. With no offset to me? Doesn’t that then amount to me paying the delinquent tax?

  • Annie

    My mortgage was in default in 2012 and 2013 and my property taxes was paid by my bank. I finally paid my arrears, including the amount for the property taxes in 2014. Since I was not the one who paid the taxes in 2012 and 2013, I was told that I cannot claim them in my tax return. My question is, now that I paid the bank back, can I claim the 2012 and 2013 property taxes with my 2014 filing?

    • Ose1

      you can file 1040X and claim the property taxes

  • Yamanoor Srihari

    I am not sure I am following the point about incentives vs. impounding, but then again, I am a beginner, and I’d rather clearly understand how much I pay each month and be done with it. Who wants to play hookey with some random tax for 30 years unless you are losing quite a bit of money..

  • Yamanoor Srihari

    Yup, I was about to put the Kibosh on the whole home buying research myself…

  • Just Curious

    Someone paid the delinquent taxes on a property. The 5 year dealine is fastly approaching before the property will be lost due to the inability to pay the taxes. Can filing Chapter 13 save the property via consolidation?

    • Gerri Detweiler

      Talk with a bankruptcy attorney to find out. Bankruptcy laws vary by state. You should be able to get a free consultation. Visit the website of the National Association of Consumer Bankruptcy Attorneys website if you need help finding one.

  • Paul

    My home is in Calif and I pay property taxes directly to county assessor. My taxes are based of an assessed value stated on bill, not the much higher purchase price. If you include taxes in loan payment, does the bank make assessed adjustments accordingly?

    • Gerri Detweiler

      If the lender is escrowing for taxes, they should be the tax bill annually from the county and then adjusting your escrow amount accordingly each year. If there is a shortage because your tax bill increases, you’ll have to make it up over the following year and your mortgage payment will rise accordingly.

  • sj

    We were unable to pay $2200 of our $6,000 property tax. We had our mortgage company incorporate this $2200 into our mortgage. Payments went from $670 to $2373 a month. They added next year’s taxes into our mortgage to be paid from July to December thus the huge increase in monthly payment. We advised them there is no way we can pay this huge increase – we only asked for the $2200 to be added into mortgage. They told us it was then considered a forced tax and without paying the increased house payment, we would be default and foreclosure would take place. When asked for the recording to prove that we agreed to this – which we never would have – we were told they could not provide us with the recording. Where do we go for help before we lose the house????

    • Credit Experts

      We sent you an email. (And there is an upcoming story addressing this issue).)

      • Shawn

        Can you please address this issue? I have the same problem.

        • Gerri Detweiler

          @Shawn – can you describe your situation?

  • jeff

    how much is the property tax a moth usually? i
    m from california

    • Credit Experts

      Jeff —
      It is related to both the location and value of your home. (And some places exempt a certain dollar value or percentage of value from the taxable value — or they allow taxes to go up only a certain amount annually for homeowners.) Unfortunately, it is impossible for us to tell you.

  • mattbl

    My wife and I bought our first home in Dec 2014. We were making monthly payments with escrow of about $1280/mo. This July, 2015, we received a letter from our mortgage company informing us our property taxes had gone from $2500/yr to $3500/yr b/c our estimated property value went from $165k to $195k. Our house was near foreclosure when we bought it so it was a good deal and value increased because the house was now occupied.

    So now we’re having to pay an extra $80/mo for the tax increase, plus an extra $100 or so per month for 10 months to make up for the $1,000 deficit in our escrow account. All of this makes “sense” to me, but I’m feeling very blind-sided that my mortgage broker and real estate agent did not tell us this ahead of time. They both even told us how the property value would go up, but when talking about our per-month cost, our mortgage broker never mentioned property taxes would also go up (duh, but hind-sight is 20/20).

    Admittedly, $180 isn’t a drastic increase per month, but if we could easily afford an increase like this we would simply have bought a more expensive home. We bought what we could afford comfortably, now it’s not so comfortable.

    It’s all a bit “obvious” looking back on it, but for first-time buyers there are 100 things you’re trying to comprehend and 100 more things you’re trying to remember to ask and I feel it’s easy for something like this to slip through the cracks.

    • Credit Experts

      Thanks for sharing — maybe it can help someone else avoid a bad surprise.

  • Heiby Bello

    when i bought my house 2 years ago, myrtle Beach SC, i paid $700 in property taxes. i fell to apply for legal residency and my taxes when up to $1700. after applying, i received $1000 back from the treasures office, but my mortgage company still increased my payment from $830 to $1100. there is no way i can pay for this. i have sent all kind of documentation to make them understand their mistake, but nothing so far. what can i do? please help me….

    • Gerri Detweiler

      Have you tried appealing to the CFPB? My understanding is that they have information and collect complaints about mortgage servicer errors.

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