When tax escrows are set up based on the value of the unimproved lot, new home buyers are in for a nasty surprise when the actual taxes are based upon the value of the lot with the new home. I needed to bring this subject to light again. I recently received another call from a lady who wanted to take legal action against a new home builder. The issue was in regards to her escrow shortage. Don’t get me wrong I am not saying all builders are the bad guy. I agree ultimately the homeowner is responsible for what ever type of loan they get. There is however issues with how the builders mortgage company set up tax escrows. Tax escrow shortages have contributed too many foreclosures across the country. I don’t have actual numbers but I would be willing to bet new home construction foreclosures are higher than existing homes. Here is what you need to know to protect yourself.
Escrow shortages- this happens when the builder’s mortgage company collects taxes based on un-improved property taxes. Let’s assume you paid $300,000 for your new home and the taxes on that home are based on $30,000. This is an example of how taxes would be on recorded for that particular property. The mortgage company would collect a tax escrow based on the un-improved value of $30,000. This is where your escrow shortage takes place and causes issues down the road. The correct way to set up your escrows on a new home is for the mortgage company to collect the taxes based on the percentage rate in your city. So if taxes are roughly 2.5%, then the builder would collect taxes on 2.5% of $300,000. Unfortunately this typically is not being done with builders.
This issue results in your payment going up once your current mortgage company realizes you have a tax escrow shortage. Your option when this happens is to pay the shortage, refinance or have your payment increase to cover the shortage. Typically your payment will increase around $200 to $400 dollars. This type of increase normally results in unnecessary foreclosures
Escrow shortages can be avoided with better regulation within the builder and mortgage community. A disclosure is provided by mortgage companies at closing stating they are collecting un-improved property taxes. During this entire process most home buyers are not clear on this issue and just sign this disclosure. Just like any other industry with better regulation and accountability most of this could be avoided.
Make sure you avoid this issue if you are about to buy a new construction home. This particular escrow issue has caused unnecessary problems due to a lack of proper explanation to the buyer. During the home buying process make sure taxes are set up correctly if you buy a new construction home. Don’t allow the mortgage company to set up your escrow based on un-improved taxes.
A escrow shortage will result in a foreclosure that stays on your credit report for 7 years. Buyer beware…….
Author: Mike Clover
CreditScoreQuick.com
