One question we hear from time to time at Credit.com and elsewhere is what happens to a homeowner who is current on the mortgage but is delinquent on property taxes? This situation illustrates the fact that there are a number of parties who have a stake, often competing, in your home. What happens when one of them comes after you?
For answers, we reached out to Eric Forster, the Managing Principal of Forster Realty Advisors. He’s an authority in the areas of real estate and mortgage fraud, brokerage standards and practices, and he’s the Co-Chair of the Real Estate Experts subcommittee of the American Bar Association. He also wrote the Mortgage Applicant’s Bible.
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Foster said that there are really only three options for people in this situation.
1. Negotiate. In some cases, homeowners will be able to work out a payment plan with their municipalities, though Forster points out that, “Many will not negotiate.”
2. The Bank Steps In. In many cases, your lender will step in and pay the delinquent property taxes to protect their interest in the home. Forster explains that, “Usually the lender will secure the tax advance by a 1-year second mortgage, and may also force the impounding of the property tax to prevent future delinquencies … Future taxes are collected by using the impound account, where 1/12th of the annual tax bill is collected with the monthly mortgage payment. The 2nd mortgage is used to pay off the current property tax delinquency ONLY.”
Tax Sale. “Upon delinquency, and following a grace period, the municipality will do a ‘tax sale,'” Forster explains. “The length of the grace period varies from one municipality to the next, and can be anywhere from one month to five years.” So, a tax sale is when the municipality is selling the tax bill, not the property. “The buyer is buying the state’s interest in the delinquent taxes. The interest rate he charges the homeowner is set by the state, and can be as high as 18%. If the homeowner continues with his tax delinquency, the lien-holder may foreclose on the property.”
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“There are no other options for tax delinquencies,” Forster says, though in some cases lenders may try to mitigate the risk of property tax delinquencies when they first lend out the money, by trying to identify high-risk borrowers. “Lenders try to minimize the risk of a tax delinquency by requiring homebuyers to have the property tax impounded (also known as “escrow accounts”) on loans in excess of 80% of the purchase price.”
Are you delinquent on your property taxes? Share your story in the comments section.