A couple of weeks ago we wrote a column about real estate taxes and real estate tax escrows. Most homeowners pay their property tax bill via an escrow with their lender, but that doesn’t always work out as it should. We wanted to share a few of the comments we received.
Comment: In your response to a question about property taxes you made a slight error when you said that once a mortgage is paid off the lender no longer has an obligation to pay your real estate taxes. In fact, the lender never has an obligation to pay those taxes; they do so for their own benefit.
We have had difficulty with multiple lenders who collected the funds, then neglected to pay the real estate taxes. Our first indication of trouble would be when we got a notice from the county of a pending tax sale in our home. The county will send a copy of the tax bill to the mortgage holder as a convenience, but the obligation to pay remains with the borrower. We have not had this problem for quite some time, either because the industry has cleaned up its act or we’ve been fortunate to land on a string of competent lenders.
Comment: I enjoyed your column on property taxes after paying off a mortgage. As a former school board member, I am well aware how little folks know about how the real estate tax system works. It becomes particularly apparent upon the sale of property. There is a lot of confusion about when property taxes are due and what happens when people pay off their mortgage.
What most people don’t realize is that when you pay off a mortgage there is often money left in escrow that will be returned so the former mortgage owner will have some money available for the next payment.
Our take: Thank you both for your comments. Let’s start with the first reader’s comments relating to a lender’s payment of real estate taxes when the lender holds those taxes in escrow.
You should know that once the lender takes funds from a borrower to pay the real estate taxes on a home, the lender has an obligation to make those payments.
If you send money to the lender for the payment of real estate taxes and for your homeowners insurance, rest assured that there are laws on the books that require the lender to make timely payments. And, by timely payments, these laws specify that the lender must make the payment before the payment is due.
(Note, however, that if you are late in making payments to the lender, the lender is not obligated to cover the shortfall; although, they sometimes do because the payments to taxing authorities are largely automated due to the lender’s interest in making sure the taxes get paid so the property isn’t sold for nonpayment of taxes.)
You can find more information on the lenders’ obligations to receive, hold and make payments from real estate and tax escrows on the Consumer Financial Protection Bureau website.
Having said that, the reader is still correct in saying that the ultimate responsibility for monitoring real estate property tax bills, and making sure the payments are made, lies with the homeowner. Sam always tells his clients that they must monitor when their lenders make payments to make sure that all payments are made on time.
Ultimately, if the lender messes up, the homeowner ends up with the short end of the stick. The lender will ultimately pay any late fees and fines, but the homeowner will be the one getting the county notices about the home being sold for the non-payment of real estate taxes, the homeowner may see their credit report and score suffer and the homeowner with face the hassle of everything else that comes with getting their lender to correct the issue.
The bottom line is that the lender has the obligation to make those payments, but the owner still must make sure those payments get made on time, and properly.
Our second reader points out that once you pay off your loan, the lender may have unused funds in the escrow account that must be returned to you within 30 days (or so) from the date you made the loan payoff. Once you pay off the loan, you — the homeowner — must make sure to pay your own real estate taxes and your homeowners insurance premium on time.
If you forget to make those payments, you’ll learn a few expensive lessons. Taxing authorities charge a hefty fee if you pay your property taxes late. If you fail to pay, they’ll eventually sell your property for the tax bill in an auction, which will require you to pay the investor to redeem your property. If you are late paying your homeowners insurance premium, the insurance company will charge you a late fee and, if you still haven’t paid, will ultimately cancel your insurance.
The smart thing to do? Once you’ve paid off your mortgage, set aside cash each month to make sure you have enough on hand to pay your real estate taxes and insurance premiums. Use a separate account if that makes it easier for you. Your former lender will eventually send you a check for any amount left in your escrow account (call them if you don’t receive those funds in six weeks), and you should consider setting that money aside as well for the future payment of your real estate taxes.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)