‘Tis the season to include tax holdbacks!
It’s that time of year again in Oregon where lenders will begin collecting real estate tax holdbacks for transactions closing in September & October where the first payment of the new mortgage is in November or December. Every year tax holdbacks end up being the source of frustration for many homebuyers who end up having to bring in much more money than they had anticipated for closing. Why?
Typically because their lender “forgot” to include the escrow holdback on their initial good faith estimates (GFE’s). It’s important to know that tax holdbacks are required by all lenders and apply to all loans even if the buyer has elected to pay their taxes and insurance separate from their monthly mortgage payment. If an applicant does not see it on their GFE it is probably because the lender has neglected to include it. Don’t get burned by an inexperienced mortgage professional!
Here are some answers to some FAQ’s about tax holdbacks:
What is a tax holdback?
A tax holdback is when the escrow company collects a lump sum of money from the homebuyer & seller as a part of the settlement charges at closing in order to hold the money in an escrow account until they can satisfy the annual property tax bill when it is released for the subject property (usually near the end of October or beginning of November).
Who determines if a tax holdback is required for a specific transaction?
It’s the lender’s decision. They will instruct the escrow company to conduct an escrow holdback for all loans originated from early September until the property tax bills are released near the end of October when the first payment date on the new loan is in November or December.
Who determines how much is collected for the tax holdback?
The escrow company is the entity that determines how much is collected. Most escrow companies that we’ve worked with will collect 110%-120% of the previous year’s property tax bill. For example, if the previous year’s tax bill was $3,000 and the escrow company’s policy is to collect 115% then they will set aside $3,450 ($3,000 * 115%). In addition, they will also have a one-time escrow holdback fee of $50-$150.
If the subject property is new construction and there is no history of property taxes then typically the escrow company will use the mileage rate and apply it to the purchase price then take 110-120% of that figure.
Who pays for the tax holdback?
The escrow company will prorate the amount collected from the homebuyer and seller based on the number of days each will own the property in the current tax year. For example, if the close date for a home purchase is October 1st then the seller will be responsible for paying for the first 3 months of the real estate tax year (July 1-September 30 or 25%) and the homebuyer will be charged for the last 9 months (October 1-June 30 or 75%). However, it’s important to note here that the seller’s contribution (25% in the aforementioned example) is based on last year’s tax bill only without the 110%-120% cushion.
What if there is an overpayment into the tax holdback?
Typically 110-120% of the previous year’s tax bill is more than enough to cover the amount shown on the new tax assessment. If that is the case then any difference between the amount collected in the escrow holdback and the actual amount needed to pay the tax bill will be refunded to the homebuyer.
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