Real estate tax and escrow/reserves explained...

Homebuyers and refinancing homeowners are often confused at closing about their mortgage lender escrow/reserve requirements.

Typically if a homebuyer’s down payment amount is less than 20% or a refinancing homeowner’s equity is less than 20%, a lender will require the homebuyer to maintain a reserves account controlled by the lender for the purpose of paying homeowner’s insurance premiums and real estate taxes.

The lender has good reason to make sure homeowner’s insurance premiums are paid in since the lender is also a named insured under the policy. Equally important to the lender, real estate taxes must be paid in order to avoid a tax lien, which would become a priority lien over the lender’s mortgage lien.

For the purposes of this discussion, we'll focus on real estate taxes.

A lender will require the homebuyer to put down a deposit at the time of closing to establish the escrow/reserves account such that the lender has enough money to pay the future real estate tax bills.

Beginning with the homebuyer’s first monthly principal and interest mortgage payment, the lender will include 1/12th of the annual real estate taxes.

The escrow/reserves deposit is calculated based on the number of months before the next tax bill is due against the number of months the lender will have collected through the mortgage payments from the date of closing.

For example, if you are closing in January then your first mortgage payment will be due on March 1. Yes, that’s correct – March 1 – because the lender will collect prepaid interest from the date of closing through January 31. That makes your first payment due on March 1 because mortgage interest is paid in arrears.

Your March 1 payment will cover the interest that will have accrued in the month of February.

So if you close in the month of January and the next semi-annual (6 mos.) tax bill is due on July 15, the lender will require a real estate tax escrow/reserves deposit equal to 3 months worth of taxes.

This is because from March 1 through July 1 you will have contributed 5 months worth of real estate taxes through your mortgage payments and with 3 months already deposited into the escrow/reserves account at the time of closing, the lender will have a total of 8 months worth of real estate taxes in order to pay the 6 month tax bill.

But wait! Why does the lender have 8 months worth of taxes when they only need 6 months worth of taxes in order to pay the bill? Well, by law, the lender is allowed a 2 month cushion in order to help cover for any sudden real property tax re-assessments or other supplemental tax bills.

In order to better assist homebuyers or refinancing homeowners in calculating how many months will be required by their lender as a deposit for real estate tax escrow/reserves, I have created the following charts below for properties in District of Columbia, Maryland, Virginia and Florida.

District of Columbia  
Closing Month # of mos. in lender escrow/reserves
January 7
February 2
March 3
April 4
May 5
June 6
July 7
August 2
September 3
October 4
November 5
December 6

DC Tax Periods
1st Half 10/1-3/31 (Due 3/15 -Paid in Arrears)
2nd Half 4/1-9/30 (Due 9/15 - Paid in Arrears)

Maryland  
Closing Month # of mos. in lender escrow/reserves
January 3
February 4
March 5
April 6
May 7
June 3
July 4
August 5
September 6
October 7
November 1
December 2

MD Tax Periods
1st Half 7/1-12/31 (Due 9/30 - Paid in Advance)
2nd Half 1/1-6/30 (Due 12/15 -Paid in Advance)

Arlington, Virginia  
Closing Month # of mos. in lender escrow/reserves
January 7
February 2
March 3
April 4
May 5
June 6
July 7
August 2
September 3
October 4
November 5
December 6

Arlington, VA Tax Periods
1st Half 1/1-6/30 (Due 6/5 -Paid in Arrears)
2nd Half 7/1-12/31 (Due 10/5 - Paid in Arrears)

Florida  
Closing Month # of mos. in lender escrow/reserves
January 5
February 6
March 7
April 8
May 9
June 10
July 11
August 12
September 13
October 2
November 3
December 4

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Comments (4)

  • michelle

    michelle

    05 March 2015 at 18:57 | #

    Do you have a calendar for Texas?

    reply

    • webmaster

      webmaster

      06 March 2015 at 13:42 | #

      We do not have a calendar for Texas. Sorry! You may try contacting a title company in Texas to see if they can provide that information for you.

      reply

    • irfan

      irfan

      03 July 2015 at 11:18 | #

      hi Michelle
      Did you manage to get the texas calenda. i contracted a home and is due completion in september and the closing is expected suptember end. i wanted to check how much cash i will need in sept end at the time of closing for reserve account
      regards
      irfan

      reply

  • andrea

    andrea

    11 May 2016 at 09:58 | #

    Can you explain why, in Florida, if you close in June you need 10 months property tax reserve? I don't really understand what you're paying for, the following year?

    reply

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