This is a series of blog entries in which we provide some quick answers to lenders’ frequently asked questions (FAQ).

Borrower’s failure to pay property tax liens often is a good indicator that the loan, and the collateral, are in trouble; and that soon, Borrower will fail to pay the scheduled installments on the loan.

So, a lender or a loan servicer should add these topics to the task list: (i) monitor state tax due dates, and then (ii) dealing with property taxes (if they are not paid).

This topic is very state-specific in that each state seems to have its own rules on this topic.  Even with that important qualification, these general statements will get you started on this important topic –

FAQ #38 – Should Lender pay off state property taxes before foreclosure?

  • If the loan documents permit the Lender to pay these taxes (and this should be permitted under the loan documents – but read the loan documents to confirm this), then Lender should pay unpaid property taxes prior to foreclosure in order to include such advances in the loan, and thereby increase the amount of any deficiency.

FAQ #39 – What happens to State tax liens after a foreclosure; do they "survive" a foreclosure or does the foreclosure extinguish the state tax liens (wipe them out)?

  • Ad valorem taxes encumber the property with unique powers.  So, in Texas they are "super liens" and have priority over prior mortgage liens.  This means that they are not extinguished by the foreclosure (meaning that they do not "go away").  Thus the importance for you to consider #38 above.

To read the entire Tough Times "FAQ" series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.