What Happens When Lenders Pay Off Back (Property) Taxes?

Question

Hi everyone. I'm pretty familiar with how tax liens and tax foreclosure works here in my state of New jersey. But one question I have that kind of baffles me is, what happens when a lender jumps in and pays off the delinquent property taxes?

I understand that most mortgage payments today include monies that get forwarded to the municipality to pay off any due quarterly taxes. But I also see a few situations where properties are in tax foreclosure and in danger of being lost to tax foreclosure. There might be a small mortgage on the property where the tax payments are not included in the mortgage payment for whatever reason.  The lender will then have to jump in and pay off those back taxes or risk losing the collateral that secures its loan.

Does the lender then seek to obtain the entire amount paid for the back taxes from the borrower?  Or does the lender take the amount it paid and break it down into even payments included in the now increased mortgage payment? Anyone with knowledge or experience in this area?

Chris Seveney · Answer

@Ibrahim Hughes

The answer is it depends. I invest in non performing notes and have this occur frequently. As the lender you need to comply with the contract documents (mortgage and note) and adhere at a min. To what they say.

Typically an advance on taxes is added as a charge and the lender can request that be due immediately. If you were working on a modification or forbearance with the borrower you can structure it in several different ways.

Bruce Lynn · Answer

@Ibrahim Hughes   In my experience almost every time a property appears on the tax sale list with a good mortgage on it, it will get paid off day before or day of the sale and then get pulled from the sale.  I'm sure there are exceptions, but that is my experience.   I also figure while everyone will tell you that mortgages get wiped off at the tax sale, I expect lenders don't just go away easily if there is a large mortgage they are going to loose.  Likely they will lawyer up, protest the sale, and make your life miserable and expensive while you try to fight.

How they handle with the original borrower....I would say read your loan documents for an example.  My guess is they don't just add to the end of the mortgage payment plan.  I would think they would add it to your escrow balance, send you notice that you aren't keeping your escrow balance positive, and notice to catch it up by a certain date.  Probably noticing you that you are in default in the meantime and subject to foreclosure if you don't resolve the issue quickly.   That is if you are required to escrow insurance and taxes.  If you don't have escrow account likely one of the conditions of the loan is to keep insurance and taxes current.  If not the borrower is in default, probably given some deadline to cure and subject to foreclosure.

Perhaps a borrower could arrange a payment plan to stretch it out over a couple of years...but I don't think it would be over 15-30 years.

All of this is pure speculation on my part.....probably the best person to ask would be a servicer, but that might be easier said than done.  I have seen some servicers selling servicing services at investor meetings before, but that seems kind of rare in my experience.   If you know investors in your area that do a lot of owner finance, you could ask them for a reference to a servicer who might be better able to answer your question specifically.   Hope that helps.

Minna Reid · Answer

I've worked with a ton of sellers with back due taxes (escrowed and not). Almost every time the lender simply pays it and adds it to the past due balance. I have never seen the lender actually pursue foreclosure over this, but the municipality eventually will.

Andy Mirza · Answer

Yes, lenders step in to pay the property taxes to protect their interests in the property. With non performing notes that are liquidated via foreclosure, the lender recovers 100% of their advances when there is sufficient equity in the property. The advances get added to the payoff along with the principal and interest and any recoverable costs.

When the property is underwater, advancing for property taxes is just another cost of doing business. As long as the lender bought the loan at a significant enough discount, he or she will still make a profit.

John Underwood · Answer

I beleive they add it to the back end of the mortgage.

What Happens When Lenders Pay Off Back (Property) Taxes?

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