The good news: In most jurisdictions, your mortgage lender cannot foreclose on your home for unpaid taxes. The bad news: This does not prevent foreclosure. Your town, city or county can foreclose for unpaid property taxes. If you owe back income taxes, the IRS could initiate foreclosure actions after it files a lien. Owners of tax certificates, whether local governments or private investors, can foreclose after recording tax liens.
Mortgage Escrow Accounts
While most contemporary mortgage loans require that you contribute to a tax and insurance escrow account as part of your monthly payment, some mortgages allow the borrower to decline having an escrow account. Property taxes then become the direct responsibility of the homeowner. The local government can file a lien for delinquent property taxes if the homeowner does not pay them, allowing the taxing authority to foreclose if necessary. Mortgage escrow accounts usually help homeowners avoid this fate.
Like property tax liens, IRS liens take priority and are paid first after a foreclosure, even before the mortgage lender. If there is no mortgage, any other junior liens against the property, such as home equity loans and mechanics liens, will be paid with foreclosure proceeds. When the IRS places a lien on real estate, it seldom hesitates to foreclose if the homeowner makes little effort to repay the delinquent income taxes.
Mortgage Lender Issues
Unless you are delinquent on your mortgage payments, lenders cannot initiate foreclosure for loan default. However, it is uncommon that homeowners with up-to-date mortgage payments also face unpaid property tax liens. While not impossible, this situation is rare since so many mortgage loans require escrow accounts calculated to have sufficient balances to pay property taxes when due. Lenders, however, will pay overdue property taxes when necessary. If you neglect to reimburse your lender, this may constitute a loan default, which then gives the lender authority to foreclose.
Homeowners associations often have the right to file liens against condo owners who are seriously delinquent on monthly condo dues. When the condominium documents permit homeowner association liens, condo document language or local laws usually permit the association to foreclose on unit owners who are unwilling or unable to make efforts to bring their condo dues up to date. In some cases, lenders view this similarly to delinquent property taxes and lenders will pay the back fees. This may still constitute a mortgage default, which then allows the lender to foreclose.
Some local governments sell unpaid tax certificates to investors. This allows the local taxing authority to collect overdue property taxes, while giving investors, who pay the overdue property tax, the ability to foreclose as owner of the tax certificate. Other jurisdictions, such as California, do not sell tax certificates, allowing local governments to directly collect overdue property taxes from homeowners. Often, the homes are sold at public auction for taxes due. The mortgage lender may buy the home at auction, similar to a standard foreclosure. Homeowners typically have a statutory period, usually one to two years, to pay the taxes and reclaim their property.
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