Property taxes are often paid through an escrow account that the mortgage lender establishes. The borrower then must pay additional funds for property taxes, homeowners' insurance, and homeowners' association fees (in some cases), to the lender, along with the principal and interest as part of the monthly payment. The loan servicer then pays these bills as they come due.
If an escrow account isn't set up, the homeowner is supposed to pay the property taxes separate from the mortgage. But if the homeowner doesn't pay these taxes, the delinquent amount becomes a lien on the property.
Eventually, if the homeowner doesn't get current on the taxes, the taxing authority could sell the home to recover the overdue amount. Sometimes, the local government uses a a tax foreclosure process. Or the taxing authority might sell the property outright. Or it might sell the tax lien that it holds, and the purchaser might be able to foreclose or use other procedures to get ownership of the property.
Each state has a different tax sale process.
All states have statutes that permit the taxing authority, usually the county, to get a lien on a property once the homeowner becomes delinquent on the property taxes. Under most state laws, property tax liens are granted first-lien status.
So, tax liens are superior over other liens, including mortgages, regardless of whether the mortgage was recorded before or after the tax lien.
Once the property taxes are delinquent for a sufficiently long time, the taxing authority will typically initiate a tax sale.
Generally, a list is recorded in the county records that names the taxpayer, the property, and the amount of tax due, and the list will often be published. The taxpayer will receive some form of notice of the tax sale, but in most jurisdictions, no judicial action is required.
In some jurisdictions (tax deed states), the property is sold at the tax sale to the highest bidder. After this kind of sale, the buyer gets the property's title.
In other states (tax lien states), the purchaser doesn't buy the property but instead buys the tax lien and receives a certificate of purchase. Once the redemption period expires, the purchaser gets title to the property. Other jurisdictions sell tax certificates that allow the certificate holder to foreclose the tax lien.
And in other places, the taxing authority simply executes its lien by taking the property. In most cases, state law then provides a procedure for the taxing authority to sell the property. In other jurisdictions, the taxing authority uses a foreclosure process before holding a sale or getting ownership of the property.
Several ways are available for preventing the tax sale of a property other than just paying off the full amount of the delinquent taxes. It might be possible to object to the assessment, seek an abatement, deferral, or compromise, negotiate the tax bill, or redeem the property.
State and local law usually provide a procedure for a homeowner to challenge the amount of a tax assessment and reduce the tax liability. The two main grounds for contesting an assessment are:
Once the assessment has been reduced, the homeowner might have an easier time paying off the property tax debt. Usually, you must dispute the value shortly after you receive the bill. And, in some states, you have to pay the bill before challenging the home's value.
Each state has exemptions and abatements that reduce at least a portion of the tax liability for some taxpayers. For example, tax liability might be reduced due to a taxpayer's age, disability, income level, or personal status (such as the surviving spouse of a firefighter or police officer). But you might not qualify if you're already delinquent in your tax payments.
Some states will also defer property taxes if the taxpayer proves they suffered a financial hardship. However, a deferral might not be available once the taxes have become delinquent.
Alternatively, a defaulting taxpayer might be able to negotiate a lower liability with the taxing authority. The taxing authority could agree to waive penalties and interest or give the taxpayer additional time to pay off the delinquency.
After a tax sale happens, the homeowner might be able to redeem the property. "Redemption" is the right of the property owner to reclaim the property by paying the entire sale price, plus certain additional costs and interest, after the sale so long as it is within the period that state law allows.
Generally, the purchaser at the tax sale acquires its interest in the property subject to redemption by the former owner. If the taxpayer doesn't redeem within the prescribed period, the purchaser acquires clear title to the property.
However, in some states, the redemption period happens before the sale.
Usually, a property won't go to tax sale if the home is mortgaged. Because property tax liens have priority over other liens, the lender or servicer will typically advance amounts to pay the property taxes to ensure their lien isn't wiped out in a tax sale.
Most mortgages contain a clause that allows the lender to add these advanced amounts to the borrower's total debt.
Tax sale procedure vary widely from state to state. If you're facing a tax sale, consider consulting with a competent attorney who can advise you of your rights and what you can do to prevent the loss of your property.