The amount of Property Taxes you pay can have a huge impact for both Buyers and Sellers. Yet people are more concerned about getting a good interest rate and forget about property taxes and the consequences they will have.
Let’s conceptualize you are a borrower purchasing your dream home (or investment property) on a Seller finance deal because you cannot qualify for a bank loan. You know that interest rates are normally lower and the price is almost always negotiable. You are so ecstatic about this great deal, that your payments on your future property taxes go over your head.
Now Benjamin Franklin once said “There are only two things certain in life: Death & Taxes”. It is for that reason that you should be familiar with how taxes work. Let me touch briefly on your loan with a traditional bank (also known as your servicer), they will pay out your property taxes by taking a portion of your regular payment each month. The homeowner receives an annual tax assessment notice but does not require any action to be taken by the homeowner because it is sent for informational purposes only. However, in private mortgage or no mortgage at all arrangements the property taxes must be paid directly to the towns tax office (usually in quarterly payments).
So, you’re probably wondering who is responsible for making sure the property taxes get paid in a private mortgage deal? It is ultimately the borrower’s responsibility to pay the property taxes, but also in the best interest of the lender to make sure they are getting paid. If the borrower forgets to pay the property taxes, the town can foreclose on the property and the lender will lose out on their investment.
There are two ways property tax payments are approached: Mandatory or Voluntary. Your lender can require an escrow account as a condition of your loan or required by law. Voluntary is based on an agreement between the borrower and lender that the borrower will assume responsibility to pay the property taxes in a timely manner. If the property taxes get paid by the “loan servicer” (which is your lender) As the borrower can you trust your lender to track and make quarterly property tax payments? And if the borrower is assuming responsibility to pay the property taxes, Lenders can you trust the borrower to make those payments on time?
Can you see why property taxes should have been just as important as that interest rate you were getting? Oh, and let’s not forget about the flood insurance, fire insurance, insurance premium and homeowner’s association dues you must track (We will go over this in another article so stay tuned). The Note Servicing Center can create an impound account for you which will allow you to spread out these annual payments over time (for only $15/month) if selected by your lender to be responsible for servicing. Just like in a traditional bank loan, the Note Servicing will add an additional amount to your monthly payments to pay the property tax payments to your town directly.