Taxes and Insurance

The person responsible for making tax and insurance payments can vary depending on the terms of the mortgage. The three most common ways to handle the payment of taxes and insurance on the property are as follows:

1. The Borrower pays taxes and insurance.

2. The Lender (Seller) pays taxes and insurance but then adds the amounts paid back to the balance on the contract.

3. The Borrower makes monthly contributions to an escrow account held by the Seller and the Seller pays taxes and insurance out of this account.

Helpful Hint

Regarding insurance, you should first verify the policy is issued for an amount that represents at least the full value of the amount still owed to you. (The Borrower should want to insure the property for the full value.) Second, be sure you are listed as the mortgagee, trustee or first contract holder on the policy. This way, you will be entitled to the proceeds from any insurance claim ahead of the Borrower. If you are listed this way on the policy, you should get renewal notices each year from the insurance company. You should also get a notice of cancellation if the Borrower fails to keep the policy current. Finally, if you ever do get a cancellation notice, or for any reason find the property uninsured or underinsured, immediately contact the Borrower regarding this breach and purchase your own coverage until the problem is remedied.

Helpful Hints

Regarding taxes, you can determine if the taxes are current by calling the county where the property is located. We recommend doing this on an annual basis. The Borrower's failure to keep current on taxes is a breach of contract and an indication he or she may not be able to afford the property, even if the monthly payments are current. There is nothing more discouraging than foreclosing on a property only to discover that the first expense you have is several thousand dollars of unpaid back taxes.

If the Borrower ever fails to pay taxes or insurance bills, you have the right to pay them at any time after they are in default and then add the cost of those expenses to the balance of the contract. It is always a good idea, therefore, to inform the insurance company that you should be notified if there is a cancellation or some other lapse of coverage.