If you fall behind in making the property tax payments for your home, you might end up losing the place. The taxing authority could sell your home, perhaps through a foreclosure process, to satisfy the debt. Or the taxing authority might sell the tax lien that it holds, and the purchaser might be able to foreclose.
Sometimes, the loan servicer advances funds to pay the delinquent taxes and then bills the homeowner for them. If the homeowner doesn’t reimburse the servicer, then the servicer could foreclose on the property.
Owners of real property have to pay property taxes. These taxes fund various services that the government provides, like schools, libraries, roads, parks, and the like. The amount of tax due is usually based on the home’s assessed value.
In many cases, a servicer (on behalf of the lender) will collect property taxes as part of the monthly mortgage payment and pay the taxes on the homeowner's behalf through an escrow account. But if the taxes aren't collected and paid through escrow, the homeowner must pay them on his or her own.
When the homeowner doesn’t pay the property taxes, the delinquent amount becomes a lien on the home.
Once a property tax lien is on the home, the taxing authority might eventually hold a tax sale, which is similar to a foreclosure sale. Generally, the two basic types of tax sales are: tax deed sales and tax lien certificate sales.
In a tax deed sale, the taxing authority sells the home outright and the purchaser gets a deed to the property.
In a tax lien certificate sale, the taxing authority sells the tax lien and the purchaser gets the right to collect the debt along with penalties and interest. If the delinquent amounts aren't paid, the purchaser can typically foreclose or follow other procedures to convert the certificate to a deed.
In some jurisdictions, though, a sale isn't held. Instead, the taxing authority simply executes its lien by taking title to the home. State law then generally provides a procedure for the taxing authority to dispose of the home, usually by selling it. In other jurisdictions, the taxing authority uses a foreclosure process before holding a sale.
In many states, the homeowner can redeem the home (buy it back) after a tax sale by paying the buyer the amount paid (or by paying the taxes owed), plus interest, within a specific time period. Exactly how long the redemption period lasts varies from state to state, but usually the homeowner gets at least a year from the sale to redeem the property.
In other states, though, the redemption period happens before the sale.
Property tax liens almost always have priority over other liens, including mortgage liens and deed of trust liens. (For purposes of this discussion, the terms "mortgage" and "deed of trust" are used interchangeably.) Because a property tax lien has priority, if your home is sold through a tax sale, the sale wipes out any mortgages. So, the servicer will usually advance money to pay delinquent property taxes to prevent a tax sale. The servicer will then demand reimbursement from you (the borrower).
The terms of the loan contract usually require the borrower to stay current on the property taxes. If you don’t pay up, you'll be in default under the terms of the mortgage and the servicer can foreclose on the home in the same manner as if you had fallen behind in monthly payments.
In addition to demanding repayment of the amount it paid for the taxes, penalties, plus interest, your servicer will probably set up an escrow account for the loan.
Each month, you’ll have to pay approximately one-twelfth of the estimated annual cost of property taxes—and perhaps other expenses, like insurance—along with your usual monthly payment of principal and interest. This money goes into the escrow account.
The downside to having an escrow account is that you’ll have to make a bigger payment to the servicer each month. On the positive side, having an escrow account saves you from having to come up with the large amount of money when the tax bills are due.
Most mortgages have a clause that gives the lender the ability to establish an escrow account basically at any time it chooses. The servicer sets up and manages the account on behalf of the lender.
To find out if and when the lender can set up an escrow account for your loan, read your mortgage contract and any other relevant documentation you've signed, like an escrow waiver.
If you're having trouble paying your property taxes, you might be able to reduce your tax bill or get extra time to pay. To learn about a few of these possibilities, see Options If You Can't Pay the Property Tax on Your Home.
To find out if you get the right to redeem your home after a tax sale in your state and find out the procedures for doing so, talk to a local real estate attorney or tax attorney. If you're facing a foreclosure and want to learn about options for your particular circumstances, consider talking to a foreclosure attorney.