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If you own real property, you will owe property taxes on it. These taxes are payable to the government of the state or municipality in which the property is located. You have at least two options for paying property taxes. You can pay them yourself, or if you have a mortgage on the property, you can have your mortgage company pay the property taxes from an escrow account.

Payment from an Escrow Account

If you borrow money in order to purchase your home or other real property, the lender will provide the money for the purchase and will take back a mortgage on the property. You become the mortgagor, and the lender becomes the mortgagee, also your mortgage company. Your mortgage can be sold to a second mortgage company.

As part of the mortgage agreement, an escrow account can be set up by the mortgage company to pay certain costs and expenses, including property taxes. The mortgage agreement should indicate for what purpose the money is to be used. If the money is to be used to pay annual property taxes, the mortgage agreement should say so. You send the money to the account with your mortgage payment.

Under federal law, mortgage companies have to pay interest on money held in real property tax escrow accounts only if the terms of the contract provide that that is the case. If the mortgage agreement does not specifically indicate that interest will be paid to the mortgagors, no interest is due.

Requirements for Mortgage Companies

Mortgage companies that hold real property tax escrow accounts for covered mortgagors are known as mortgage investing institutions. They must meet several requirements, including:

• Timely payment of taxes and responsibility for any penalties and interest assessed due to the late payment of taxes
• Deposit of escrow funds in insured accounts and a statement of any prohibition against the charging of fees for the maintenance of escrow accounts
• Actual payment of taxes within a certain time of debiting an escrow account
• Copies of tax receipts to the homeowner
• Notification to homeowners of the sale of mortgage servicing rights so that the homeowner will know which entity has responsibility for the maintenance of the escrow account and the payment of taxes
• Notification to homeowners, upon termination of a mortgage, that the homeowner may thereafter be responsible for tax payments and should contact the appropriate tax collecting officer for further information

The mortgage companies holding tax escrow accounts have to pay the property taxes in a timely manner. They must notify the homeowners if the companies are delinquent in their payments.

If there is more money in the escrow account than is needed to pay property taxes, the question of whether the mortgage company can continue to hold the excess money is governed by the terms of the mortgage agreement.

A mortgage company that receives more than $ 600 in mortgage interest on any one mortgage in one year must send the payer of record an IRS Form 1098, Mortgage Interest Statement. The company may include the amount of real estate taxes it paid that year, but that information is not mandatory.

Sale of Mortgage

If the mortgage is sold by the lender or the first mortgage company to a second mortgage company, the entity selling the mortgage must notify the homeowner that the mortgage has been sold to the second company and that the escrow account has been transferred to the second company. The second mortgage company then assumes the obligations of the mortgage agreement. Such a sale does not require the consent of the homeowner unless the mortgage agreement requires consent.

Questions for Your Attorney

• What options do I have for paying real property taxes?
• How do I set up an escrow account with my mortgage company for the mortgage company to pay the real property taxes?
• If my mortgage company is supposed to pay my real estate taxes from my escrow account, who is responsible for penalties and interest incurred for late payments?

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