- Property taxes are an interesting debt obligation from the perspectives of the lender and borrower. Because the obligation to pay them is directly from the government, property taxes have priority. If the government files a lien to collect unpaid property taxes by selling the home, this lien supersedes all other claims. This means that unpaid property taxes can lead to a loss of the home for both the borrower and the lender, even when the house is used as collateral.
- Because lenders do not want to lose a house just because a borrower does not pay taxes, a lender often creates an escrow account and collects extra money from the borrower to make property tax payments itself. In this case, late tax payments are caused by mistakes and payment problems made by the lender. The borrower continues to make mortgage payments in these circumstances as the lender solves the issue and pays taxes from the escrow account.
- If the borrower is not paying the mortgage debt, it is likely the borrower won't pay property taxes. This often results in a home that is in foreclosure through the bank, but also has delinquent taxes. In this case, the lender pays the taxes out of its own pocket, but no one is paying the mortgage. That is the point of the foreclosure -- lenders are trying to recover the costs of debt they are no longer profiting from at all.
- In some cases, tax delinquencies can lead to a property tax foreclosure where the home is sold for the amount of money due on the taxes. This makes it easy for homebuyers and investors to purchase these properties. In these cases, the mortgage may follow the house, which means that the buyer must agree to pay off the mortgage through the tax sale to keep possession of the house.
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