It’s that “exciting” time of year again in Oregon where lenders will begin collecting real estate tax holdbacks. This is for transactions with close dates in September & October and first payment due dates in November & December. Tax holdbacks are usually the source of frustration for many homebuyers who end up having to bring in much more money than they had anticipated for closing because lenders forgot to account for those when running estimates for buyers.
Tax holdbacks apply to all lenders and all loans, whether the buyer is paying their taxes and insurance separate from their monthly mortgage payment. If a buyer does not see it on their LE, it is probably because the lender has neglected to include it. Don’t get burned by an inexperienced mortgage professional!
FAQ’s about holdbacks:
What is a tax holdback?
A tax holdback is when the escrow company collects a lump sum of money from the homebuyer & seller as part of the prepaids at closing. They will hold the money in an escrow account until they pay the annual property tax bill when it is released for the subject property. This will happen mid to end of October.
Who determines how much is collected for the tax holdback?
The escrow company determines how much is collected. Most escrow companies will collect 115-120% of the previous year’s property tax bill. For example, if the previous year’s tax bill was $3,500 and the escrow company collects 115%, they will set aside $4,025. There is also a one-time escrow holdback fee of $75-150.
On new construction where taxes are not yet assessed, typically the escrow company will use the mileage rate and apply it to the purchase price then take 115-120% of that figure.
Who pays for the tax holdback?
The escrow company will prorate the amount collected from the homebuyer and seller based on the number of days each will own the property in the current tax year. For example, if the close date for a home purchase is October 1st then the seller will be responsible for paying for the first 3 months of the real estate tax year (July 1-September 30 or 25%) and the homebuyer will be charged for the last 9 months (October 1-June 30 or 75%). However, it’s important to note here that the seller’s contribution (25% in the aforementioned example) is based on last year’s tax bill only without the 115% cushion.
What if there is an overpayment into the tax holdback?
Typically 115% of the previous year’s tax bill is more than enough to cover the amount shown on the new tax assessment. If that is the case then any difference between the amount collected in the escrow holdback and the actual amount needed to pay the tax bill will be refunded to the homebuyer.
The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.
