If you fall behind in making the property tax payments for your home, you might end up losing the property. For example:
Owners of real property have to pay property taxes. These taxes fund various services that the government provides, such as schools, libraries, roads, and parks. The amount of tax due is usually based on the home’s assessed value.
In many cases, a loan 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 are not collected and paid through escrow, the homeowner must pay them on his or her own. (Read about whether you can get rid of an escrow account and pay property taxes on your own, if you have one.)
When the homeowner doesn’t pay the property taxes, the delinquent amount becomes a lien on the home. (Learn more about different types of liens and when a lien can attach to your home in Types of Property Liens.)
Once there's a property tax lien on the home, the taxing authority may eventually hold a tax sale, which is like a foreclosure sale. Generally, there are two basic types of tax sales: tax deed sales and tax lien certificate sales.
Tax deed sales. In a tax deed sale, the taxing authority sells the home outright and the purchaser gets a deed to the property.
Tax lien certificate sales. 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 are not paid, the purchaser can foreclose or follow certain procedures to convert the certificate to a deed.
(In certain jurisdictions, there is no actual sale. 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 most states, you can redeem (buy back) your home after a tax sale by paying the buyer the amount he or she paid (or by paying the taxes owed), plus interest, within a certain time period. Exactly how long you’ll get to redeem varies from state to state, but usually you’ll get at least a year from the sale.
In other states, you can redeem the home before the sale.
Property tax liens almost always have priority over other liens, including mortgage liens and deed of trust liens. (To learn more about these documents, see What's the Difference Between a Mortgage and Deed of Trust? For purposes of this discussion though, the terms "mortgage" and "deed of trust" are used interchangeably.)
Because a property tax lien has priority, this means that if your home is sold through a tax sale, the sale wipes out any mortgages. So, the servicer (on behalf of the lender) will usually advance money to pay delinquent property taxes in order to prevent a tax sale. The servicer will then demand reimbursement from you (the borrower). The terms of the mortgage contract usually require the borrower to stay current on the property taxes. If you don’t pay up, this constitutes a 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 mortgage payments.
So, you’ll have to pay the servicer back if you want to avoid a possible foreclosure.
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.
How much you’ll have to pay. 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.
Pros and cons to having an 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 up side, having an escrow account saves you from having to come up with the large amount of money when the tax bills are due.
What gives the servicer the right to set up an escrow account? 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 signed (such as an escrow waiver).
If you're having trouble paying your property taxes, there are a few strategies you can employ to reduce your tax bill or get extra time to pay. To learn about them, 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. If you're facing a foreclosure and want to learn about options for your particular circumstances, consider talking to a foreclosure attorney.