How Tax Foreclosure Differs From Mortgage Foreclosure

By Author: Nick Adama
Total Articles: 197
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As home values keep dropping yet property taxes keep increasing, tax foreclosure sales will become more common. Some homeowners experiencing double-digit percentage increases in their yearly tax burden, even as they are working fewer hours or taking pay cuts will inevitably come to realize that they can no longer afford to keep up with monthly housing costs that never go down.

Thus, tax sales will become more common throughout the country, especially in areas where the local government grew the most out of proportion to the surrounding community. The tax foreclosure and sale process, while similar to a regular foreclosure, also has a number of differences that make it both easier and more difficult to keep the house. Borrowers should be aware of how their local government can take their home.

Once a tax bill becomes due and is unpaid, it becomes a lien on the homeowner's property. Typically, the lien is imposed on the first day of the year after the property tax is assessed by the county. Under statutes in many states, tax liens are given priority status over any other lien, including first mortgages. In order ...
... to protect their first mortgage lien, lenders require that property tax be paid through an escrow account.

Sometimes it is the lender or servicing company itself that drives the property to a tax foreclosure sale. Whether due to incompetence or malice, tax payments are sometimes lost, applied to the wrong account, or simply held in the escrow account and never paid to the county. Other times, it is the county itself that misapplied the payment or received the tax but did not credit it to the homeowner's account.

This makes the entire process more complicated, as there may be several extra parties involved in a tax foreclosure than in a regular foreclosure due to the default of a mortgage contract. The borrowers pay into an escrow account administered by the servicing company. The servicing company holds onto these funds until the tax is due, at which time it forwards the money to pay the bill to the taxing authority. It is then the taxing authority's job to apply the payment. With all of the players involved, mistakes are inevitable.

Also, if a home is in foreclosure due to nonpayment of the mortgage, and there is an escrow account that is unpaid, the lender will most often pay the property taxes in order to prevent a lien from being placed on the house. But the amounts that the lender pays to keep the taxes up to date will most definitely be charged to the borrowers. They will be counted as part of the arrears if the homeowners with to cure the default.

Tax sales, which will be examined in a future article, also differ from the normal foreclosure process in that the bidder at auction usually only needs to pay the delinquent taxes to take over the property. Instead of paying close to the fair market value or bidding through a competitive auction, homes can be sold for as little as a few thousand dollars in unpaid taxes.

Buyers of tax foreclosures may also have to wait much longer to evict the former owners than if the house was foreclosed due to default on a mortgage. Local or state statutes may give homeowners up to a year to come up with the money to pay the taxes plus any costs and penalties and keep their home. The bidders will have to surrender their claim to the property and try again on another house.

Tax foreclosure issues will also usually be resolved outside of the court first. If the property owners want to dispute the assessment, how much they owe, or any payment amounts, they will most likely have to go through an administrative process, filing appeals or other paperwork with the county. The courts may be the final venue to decide any disputes, but homeowners may not be able to take their case into court right away. They have to go through the correct bureaucratic channels first, which makes defending the tax sale more difficult.

Tax sales, while not as prevalent as regular foreclosure auctions, may become a larger issue for homeowners as falling property values make it less worthwhile to keep paying on a home where local taxes keep increasing. In the end, counties may end up with nothing more than neighborhoods of abandoned homes generating no tax revenue at all and actually costing the community in terms of upkeep and further lowered property values.
Nick publishes daily articles on the ForeclosureFish website, which aims to educate homeowners on how they can avoid foreclosure while they still have time and options available. Visit the site today to learn more about preventing the loss of a home and recovering from a financial crisis, and download an e-book explaining the basics of how foreclosure works: http://www.foreclosurefish.net