Escrow Horror Stories

Shocked Girl

Last week, we looked a typical case study involving your escrow account and how it can increase your monthly payment due to an increase in property taxes. In that case study, this taxpayer’s house payment went up by nearly $200/mo. – never welcomed news but in an upmarket there is plenty of company in this club.

Today, we look at some more case studies which are true horror stories and can be catastrophic. Sadly, if you work in the property tax field long enough, you hear your fair share of stories. Let’s take a look at some.

John and Mary are excited about the new home they are waiting to be completed. It was started in late January of 2017 and they are closing in June!  The lender disclosed the monthly payment of $,2,175/mo which includes $1,850 for principle and interest and $325 escrowed for taxes ($1,875/yr based on last year’s taxes) and insurance ($2,000/yr actual premium) for their $400,000 house. Great news – they knew that they locked in a low interest rate but the payment is even less than they were expecting and now they can buy the furniture they want!

So far, so good. At the end of the year, the tax bill comes to the lender and sure enough, the funds needed to pay the 2017 taxes are in the escrow account as planned. They get a letter from the lender in February of 2018 which states the payment stays the same for 2018 since the escrow account had neither a shortage nor overage. In April, John and Mary receive their notice of appraised value from the appraisal district and they learn that the $390,000 market value for 2018 property tax purposes is actually less than the $400,000 they paid last summer. The notice shows a large increase over last year’s value of only $75,000 but their agent explains that is normal since last year’s value was just land (property is assessed as it exists on Jan 1 of the tax year and construction did not begin until late January – therefore it was assessed as just a lot held in builder’s inventory). They continue making payments of $2,175/mo throughout 2018. All is good – but not for long.

The letter no one wants to get. At the end of the year, the lender receives the 2018 tax bill of $9,600 (based on the $390,000 tax value) for John and Mary but the escrow account only has $1,875 set aside for taxes. There is a shortage of $7,725 which the lender covers, but John and Mary don’t have a clue. They rack up credit card bills for Christmas. The bombshell hits when the February 2019 letter arrives from their lender. They are informed that their house payment will increase from $2,175/mo to $3,295/mo. Instead of setting aside the original $325/mo for taxes, they now have do set aside what they should have been doing all along –$800/mo ($9,600/12) for taxes. This is a $475/mo increase. And worse – recall that the lender covered the $7,725 shortage for the 2019 taxes– the lender now wants that paid back over the next year at $645/mo. So John and Mary have an increase of $475 + $645 or $1,120/month for 2020.

It gets worse. They have not yet recovered from this shock and the April letter from the appraisal district arrives – it’s not good news. The Appraisal District has a notice value of $410,000 for 2019 on John and Mary’s house. This increase will cause the tax bill to jump another $500/yr or $42/mo. This year, they are proactive and challenge the value.

How can this happen? Who is to blame? What can be done?This happened because the escrow account was not set up properly by the lender in the first place. In most cases, the taxes for last year are a pretty good indicator of next year’s taxes. But not with new construction and certain other situations. Some of the process is automated but all lenders have had borrowers who have had this nightmare and someone on the lender’s side should have caught this. A good lender with an experienced loan officer would have caught this. A good agent would have been a back-up. Finally, John and Mary are not without blame. They should have asked questions. As far as what can be done, depending on their financial situation, John and Mary may want to visit with their lender. If they cannot make the payments, perhaps the portion to make up the shortage can be spread out over 24 months instead of twelve.

 

What other situations can result in a horror story involving the escrow account?

There are a number and we won’t go into each one in this blog post, but they all have a common denominator of the lender using only last year’s taxes to set up the escrow account. The escrow account should be set up by projecting future taxes. As mentioned, most of the time there are not huge changes in property taxes from one year to the next but any of the following can trigger the need for additional research and questions:

  1. If the seller has an over 65 exemption or an exemption due to being disabled, the school taxes (and in some cases other taxes) are frozen at the actual dollar amount they were when the seller turned 65. Depending on the age of the seller, the school taxes could increase by 100% or more when this exemption is removed.
  2. If you are paying substantially more than last year’s market value as shown on the tax rolls, your future taxes are likely to go up substantially.
  3. If you do an extensive remodel or add on to the house, your future taxes are likely to be much more.

What can you do?

  1. If you think your tax will be greater than last year’s due to either an increase in market value or loss of exemptions, ask questions. If the lender insists on using last year’s taxes for the escrow, then set aside the extra yourself.
  2. If your tax value goes up due to a purchase or improvements made, you can always challenge the increase, but you must do so timely.

 

You may not be able to stop the increase completely but at least put a drag on it. You’ll be getting your 2019 value notice around April 15 and there is a 30 day window to challenge it – usually until May 15. To make sure you don’t miss the deadline, be sure to sign up with propertytax.io in the window to the right.

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