If you own a home or work in the lending business, chances are you know what tax sales are. As a refresher, when a borrower becomes delinquent on their property tax sales, their home is at risk of being auctioned off in a tax sale. While it is not uncommon for borrowers to get a little behind on their property taxes, it becomes problematic when they become too delinquent, per their particular state’s regulations. Each state has different guidelines when it comes to residential tax sales (which we discuss in this blog). With that in mind, it is a good idea for borrowers and lenders alike to understand the specifics surrounding residential tax sales in their state, as some states have a much smaller redemption window than others.
Today we are going to look at some of the most common issues with tax sales. For example, if a borrower becomes delinquent on their taxes and never gets caught up, their house could be sold in a tax sale. If the borrower still can’t pay the debt, the house may be foreclosed upon, which causes issues for the lender.
Tax Sales and Financial Institutions
For financial institutions, the risks are incredibly high whenever lending money. This is why the loan process is so detailed and in-depth. It is in the best interest of banks and credit unions to ensure the individuals to whom they are lending money can make their payments and pay back their loan in good faith. When they make a misjudgment and lend to someone who does not have the capacity to pay back their loan, problems can arise. Not only do financial institutions stand to lose more money, they can also lose the entire property.
For this reason alone, it is quite common for financial institutions to be fearful of loss and risk when it comes to lending money. Tax sales are quite common and cause major problems for the institution that holds the loan. While the loan application process plays an important role in ensuring only the most reliable borrowers are approved, it is not enough. Real estate tax monitoring is another way to keep track of property tax payments and help the institution get out ahead of any problems.
As mentioned in the previous paragraph, it is imperative for financial institutions to take a proactive approach to lending and tracking all accounts, especially residential mortgages. Tax delinquencies (and tax sales) can be prevented by outsourcing the critical task of real estate tax monitoring to a knowledgeable third-party vendor.
A good vendor will notify your institution as soon as a borrower is delinquent on their property tax payments, allowing for enough time to make up the debt before the property is sold in a tax sale. For more information on residential tax sales and some of the most common issues we see with them, please download our latest ebook, The Impact of Tax Sales on Financial Institutions.