Municipal tax payments that go unpaid can get super-priority over a properly registered mortgage. Lenders never want this to happen as it threatens their security and creates a possibility that their loan may not be repaid in full. When taxes go unpaid, the municipality can claim for unpaid taxes and can force the sale of the property to recover these unpaid taxes. To protect against this, a lender may require a borrower to remit a tax installment payment in addition to the normal mortgage payment. A lender will accept these funds and hold in a tax account for the benefit of the borrower, then pay these funds directly to the municipality when due. This protects the lender’s interest by ensuring the taxes are never in arrears.
Common in mortgage terms is the requirement for a borrower to pay property taxes when due, and a failure to do this will be a default of your mortgage. A lender will have the ability to pay these amounts on the borrower’s behalf, then charge penalties and interest on any such payment(s) made. Lenders vary in their requirement to collect and remit property taxes on the borrower’s behalf, often imposing the requirement on new buyers while forgoing the requirement on more well-qualified or well-established borrowers.
When a mortgage is paid out prior to the property tax payment being remitted to the municipality, the lender will credit the amount collected against the funds due by the borrower on the repayment date. When selling, your lender will provide what is called its “payout statement” and there will be a line item showing the amount existing in the tax account, that it is credited back to the borrower and that the borrower needs to repay that much less to discharge the mortgage.