- The Washington Times - Thursday, March 25, 2004

The mortgage payment for most homes is divided into four parts: principal, interest, insurance and taxes.

The principal and interest are for the mortgagee (lender). The insurance is held in an escrow account from which the lender draws through the year to pay for the hazard insurance.

Most loans also have a tax payment, which goes to the local taxing agency, also forwarded by the lender at the appropriate time.

The full payment usually is sent to one processing agency — possibly the lender from whom you borrowed the money — and the lender hangs onto the taxes and insurance part of the payment to send to the appropriate agencies when they are due. Not all mortgages are so simple, however.

One reader shared with me a story that, unfortunately, is too common and can cause a lot of headaches for the owner-occupant.

He purchased a property with a contract for deed, meaning the seller of the house still has a real estate mortgage on the property. The new owner’s payments are sent to the former owner, who then turns around and makes payments to the original lender.

The problem arose when the new owner received a note from the county saying he was delinquent on his taxes and could face foreclosure if they were not brought current.

The contract and subsequent note the new owner signed apparently were not clear on what was included in the payment. The former owner apparently was not sending taxes to the local jurisdiction when they were due. Instead, he was leaving it up to the new owner to take care of his own tax bill.

This is a hazard when dealing with owner-financiers who have little experience in writing notes or don’t use established practices when constructing a promissory note.

Note: if you are faced with an owner-financing situation, be sure to have a lawyer and a mortgage professional look over the paperwork to ensure that all the documentation is satisfactory. In addition, have them explain what is required of you as the new owner and borrower.

The new owner in the situation I described is working on bringing the taxes up to date.

Learn from this man’s mistake. Not all mortgage companies service the escrow accounts. If you find yourself in such a situation, you’ll need to start holding back that amount of money to prepare your personal budget for those payments when they are due.

Hazard insurance is usually due once per year and can run several hundred dollars.

In most jurisdictions, the taxes will cost more than the hazard insurance and are paid once or twice per year.

Nevertheless, depending on the value of the property and the loan amount, the escrows could run from less than $100 to several hundred dollars per month. In most cases, some of the escrow is tax-deductible, so be sure to keep good records so you can deduct the appropriate amount come tax time.

Even if your lender is supposed to handle all the escrow issues on your account, some borrowers may be surprised to receive a notice from the taxing jurisdiction or the insurance company that their taxes or policies are delinquent.

When this happens, don’t delay in contacting your lender and the agency that sent you the letter.

The Real Estate Settlement Procedures Act regulates what lenders are supposed to do and not do regarding escrow accounts. Paying the insurance and taxes on time is definitely in the “to do” file.

For information on escrows and the lenders’ responsibilities, visit the U.S. Department of Housing and Urban Development’s Web site (www.hud.gov). To get to the escrow section, click Owning in the left bar, then click Escrow Accounts, under Paying Your Mortgage, about halfway down the page.

M. Anthony Carr has written about real estate for more than 15 years. Reach him by e-mail ([email protected]).

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