Why Are You Holding For Taxes?

"Why are you holding for taxes?" is a question that we get throughout the year prior to the collection of real estate taxes. Taxes in the State of Ohio are paid in arrears* and they are due twice a year. Depending on what county you are in, the first half tax bill is issued sometime from January on and the last half tax bill is issued sometime from late June on. During collection time, we get many calls from lenders, borrowers and buyers who ask the question, "Why are you holding for taxes?" With all of the refinancing that is being done, borrowers (buyers are also affected) should be aware that most lenders will require that the title company hold and pay the next half taxes even before the tax bill has been issued. Due to the fact that the taxes have a priority lien on the property, lenders will specifically write in their instructions to the title company, that the taxes must be paid and that any taxes that are due in the next 30 - 60 days of close must be paid as well. Although the lending institution is the one who dictates that the taxes be held, we still will get calls from loan officers who are usually trying to have their client bring in the least amount of money if they have to bring money to close. 

Last half taxes for 2011 (which will be out sometime towards the middle or end of June, 2012 in Cuyahoga County) will be out soon in most counties. If lenders are not requiring that the last half taxes be held or paid, then they will be in the coming weeks. Most lenders want to make sure that there is no question of their priority and they need to determine how much to hold should they be escrowing taxes. Most tax authorities will not issue a tax bill prior to the actual issuance of the tax bill; therefore when the taxes are required to be held by the lender, the title company may not always know the exact amount of what the tax bill will be. When this happens, the title company must hold one and a half times the amount of the last available tax duplicate in order to make sure that once the bill is issued, they have enough money to pay the bill. Once the payment is made, any extra funds are paid directly to the borrower.

For the last half tax amount, there is usually a tax bill that was issued at the beginning of the year to refer to. Normally, half of the bill was paid, so you can determine the amount that will be due when the last half tax bill is issued. First half taxes, however, are different. If you are closing a deal from November on and a lender is involved, the lender will ask that the first half taxes be held and paid when the bill is issued. This is where the title company will not be able to determine what the first half tax bill will be and the taxing authorities will not be able to give you a definite answer. It is at this time that the title company will hold one and a half times the amount on the last available tax duplicate to make sure that there are enough funds to pay the actual tax bill that is issued. Any extra funds will be issued back to the borrower at close.  When funds are held for a future tax payment, there will be a post closing escrow agreement that the borrower will need to sign that will dictate the terms of the hold.

REALTORS® may want to retain this information for when you have a buyer who is closing towards the end of the year. Please use this as an explanation for why most lenders will require payment of first half taxes at close prior to a tax bill being issued and there may be a need for a hold of one and a half times the taxes.