Understanding property taxes at closing (arrears, settlement, insurance, escrow)

[progmac]

Okay, let me make sure I've got this right. Closing on a house today. Numbers aren't real, but the concepts are the same. I will be doing escrow to pay property taxes.

In Ohio, property taxes are paid six months in arrears, most recent bill was paid in full by sellers, which represented the period jul-dec '09.

For the sake of this discussion, taxes will be $100 a month.

So on the HUD settlement papers I have a credit of $800 from the buyers for eight months of taxes (Jan - Aug). This makes sense.

Here is where I'm getting confused. Later on the HUD form it says I am depositing four months taxes into an escrow account. There is an aggregate adjustment of the equivalent of about a month and a half of taxes reducing the total in the escrow account. The lender explained that the law required they only hold so much. I'm assuming four months was the number used because it is two months (the most they can 'cushion' the escrow) plus two months representing money they will need to pay the next tax bill, since they will only get four months of taxes from me before the next bill is due. But with this number being adjusted downward, will they have enough to pay the bill and maintain the two month cushion they need? It seems they won't.

Okay so back to the buyer's giving me a credit for eight months taxes. I know I shouldn't see this as "free money" - how should I see it? Should I hang on to it until such day that I sell? Because, if we are taxed six months in arrears, I will be guaranteed to owe at least six months taxes, right? Is this impacted at all by my escrow account?

Any thoughts appreciated. Thanks!

[FalconheadWest]

Could you rewrite your scenario with using Buyer and Seller at the appropriate times? I'm confused as to whether you're the buyer or the seller so it's hard to answer. You've represented yourself as both throughout the scenario.

[Lacerta]

Yeah, I'm confused by that too. The seller would give the buyer a credit for Jan - August, not the other way around. And the buyer would set up a new escrow account, not the seller.

Assuming you just mixed up a couple of "Buyers" and "Sellers", and that you are the buyer, it sounds like you have the rest of the process correct. The seller credits the buyer for taxes for time that is passed, but not yet due. The buyer sets up an escrow account sufficient that, with the remaining months due before taxes or insurance are due, there will be sufficient to cover them at that time. Escrow accounts OFTEN get adjusted several times in the first few years. You might get a check back one year, or you might get a bill (bills usually say you can pay them all now or have them prorated into the next 12 months of your payments). Your payment will adjust slightly each year to cover changes in taxes and insurance, and to make sure the escrow balance remains above the minimum and below the maximum.

The one thing I didn't follow was the "aggregate" adjustment" in your escrow account. I read that you are giving them 4 months but only 2.5 months worth is going into the escrow account. Where is the other 1.5 month going? I've never heard of such a thing. I agree that means they won't have enough to maintain their cushion, and maybe not even enough to pay the tax bill in the first place, and what about the insurance bill? Are you paying that yourself?

And yes, you will owe taxes, anywhere from 6 months to a full year, when you sell, depending on at what point in the tax cycle you close. So you should budget for that, whether you save the money now, or wait to sell until you have enough equity to cover it all.

[progmac]

okay guys thank you for responding even though the mixing up of "buyer" and "seller" in my first post made it all but unreadable. yeah, the sellers are the ones contributing to the escrow. i successfully closed and managed to wrap my head around the whole thing. again, thanks for trying to decipher a pretty rotten post!