Tax Debt Leading to Foreclosure & Legal Concerns
Sometimes a foreclosure on a home arises from the homeowner’s failure to keep up with paying their property taxes. These taxes can be paid on your own or through an escrow account held by your mortgage servicer. Regardless of the method that you use, a failure to pay taxes leads to a lien that attaches to the home. A foreclosure could result in several ways. The tax agency to which you owe the debt could foreclose on the home and sell it, or it could sell the tax lien, and the purchaser of the lien could foreclose on the home. In other situations, the mortgage servicer might advance payments for taxes if a homeowner has fallen behind, and then it might foreclose on the home if the homeowner cannot pay off the increased fees.
Foreclosure by the Tax Authority
This type of foreclosure results in a tax sale, which may take the form of a tax deed sale or a tax lien certificate sale. While a tax deed sale involves selling the home and giving the purchaser a deed, a tax lien certificate sale involves selling the tax lien to another party that takes over the responsibility of collecting on the debt. This party then would have the right to foreclose if the homeowner does not catch up with payments and pay off any penalties and interest. The purchaser of the lien alternatively might be able to convert the lien certificate into a deed.
Some states allow the tax authority to take title to the home directly rather than conducting a sale. It can sell the home afterward according to the procedures provided by the state.
A homeowner may have up to a year or even more to redeem their home after a tax sale. This would require reimbursing the purchaser of the home for the sale price and paying interest, or paying off the tax debt and any interest on it. You might be able to redeem your home before the sale as well, but this is usually not feasible because people facing foreclosure are dealing with significant financial trouble.
Foreclosure by the Mortgage Servicer
The mortgage servicer has an incentive to make sure that a homeowner keeps up with paying property taxes. This is because a tax lien has priority over any other liens on a home, even including a mortgage or a deed of trust. To make sure that the tax payments are current, the mortgage servicer will advance money for them and then require the homeowner to reimburse them for the costs.
Failing to keep up with property taxes or reimburse the mortgage servicer for advanced funds usually will constitute a breach of the terms of the mortgage contract. This allows the mortgage servicer to use the same foreclosure process that it would have used if the homeowner had failed to keep up with mortgage payments.
To reimburse the mortgage servicer for any advances for tax payments, a homeowner often will need to make monthly payments into an escrow account. These payments will cover the principal and interest on the loan, in addition to tax payments, insurance costs, and any penalties. Using an escrow account results in larger monthly payments to the servicer but breaks down tax payments into smaller amounts than if you paid them on an annual basis. A homeowner usually does not have the right to challenge a mortgage servicer’s decision to set up an escrow account if their mortgage provides for it.
