Can a Mortgage Company Foreclose if I'm Late on Property Taxes?

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Failing to pay property tax never ends well. While the exact procedure varies from state to state, if you delay long enough, your local government will lose patience and take your house to settle your debt. It's also possible, in some circumstances, for your mortgage lender to foreclose and take the house first.

Lien Seniority

Normally a foreclosure pays off liens in the order of seniority. Your mortgage lien is the oldest lien on the house so it gets paid off ahead of judgment liens and second mortgages, even if the second-mortgage lender starts the foreclosure. Property taxes are the exception. If you fall behind in your taxes to the point the county can foreclose, the county gets paid first. Your lender and any other lienholders get paid from the leftovers.

Strike First

Your lender has a vested interest in foreclosing ahead of the county, because that way the it gets paid first. A lender can't foreclose just because you owe someone else though. Instead, the lender can pay the property tax, then increase your monthly payment to include the bill. If you don't meet the increase, that goes on the books as a partial mortgage payment. Eventually, if you don't make up the deficit, that gives your lender grounds to take the house.

Escrow Errors

If your lender requires you make monthly payments into an escrow account, other problems can crop up. Your lender pays property tax and homeowners insurance out of the account to prevent you missing a payment. If property taxes go up and you don't read the lender's payment-increase letter -- or if the lender doesn't send one -- you won't pay enough into escrow. The lender may take part of the mortgage payment to cover the added tax, putting your mortgage into default. Then you're in line for foreclosure.

Predatory Lenders

If you're seriously behind on property taxes, you may be tempted to go to a property-tax lender rather than risk foreclosure. These are specialists who offer to pay off the tax bill with a loan. Many of them are predators who tack on fees and penalties to a usurious level. Dealing with such lenders is incredibly risky to your finances.