Q: I will be purchasing a new condominium unit when construction is completed, and settlement is presently scheduled for the end of September. According to a pamphlet I received from the mortgage lender, the Real Estate Settlement Procedures Act (RESPA) limits the maximum amount (of taxes) a lender can require the borrower to pay to the amount of taxes accrued between the last tax due date and the date of the first mortgage installment payment, plus two additional months escrow for taxes.
Since the tax year in Montgomery County ends June 30, my estimate of the taxes which I will have to pay in escrow was six months -- four months from June 30 to the first mortgage payment in November, plus the two additional months authorized by RESPA.
The mortgage lender says that I will be required to pay 14 months taxes, since the deadline for paying the June 30 tax year is not until Sept. 30. Does this mean that if I postpone settlement until after Oct. 1, my payments at settlement will only be four months (Sept. 30 to Dec. 1, the first mortgage payment date, plus additional months)?
A: The entire question of escrow for taxes is confusing and complex. It has also been a very significant consumer issue, which consumer organizations have attempted to resolve through litigation and legislation.
As has been mentioned in this column on several occasions, the laws differ on this issue depending on whether you live in Virginia, the District or Maryland.
In the District, if you put down 20 percent or more equity when you purchase the property, you have the right to pay your own taxes when they become due, without having to escrow anything.
Although lenders in Maryland have the right to escrow taxes, savings and loan associations and banks that collect escrows have to pay you interest at passbook rate. Mortgage bankers do not have to pay interest in Maryland.
In Virginia, there are no provisions dealing with escrow for taxes. Thus, lenders are free to collect what they want -- subject of course to the RESPAlimitations noted in your question.
If you settle in Maryland in September, your first mortgage payment will be due Nov. 1. Because interest is paid in arrears, your November payment will cover the interest for the month of October.
When you make your first payment in November, you will be required to add 1/12th of the real estate taxes which the lender will hold in escrow. Since the taxes will be due by Sept. 30, 1983, if you make your payments each month from November until next September, the lender will have 11 months taxes in escrow. Since they will need 12 months (a whole year) to pay the taxes, they have the right to collect this additional month's taxes at settlement. Also, they also have the right to add the two-month cushion. Thus, when you settle in September, the maximum that the lender may charge you is three months escrow for taxes.
However, since the real estate taxes in Maryland are due and payable by Sept. 30, and since the real estate taxes are payable in advance, the title attorney conducting settlement will also have to charge you for the full year's real estate taxes from July 1 through June 30, 1983. Since you did not buy your house until September, you will get a credit at settlement for the months of July and August and a pro-rata share of September.
In effect, you will be charged nine months for the taxes which will have to be paid to the county for real estate taxes as well as escrow for the next year's real estate taxes.
In the District, for example, where the taxes are paid twice a year (Sept. 15 and March 30), a buyer does not have to pay as much up front real estate taxes.
Thus, in your situation, the estimate given by your lender of 14 months includes not only escrow for future taxes, but also taxes due and payable to the county for this fiscal year (1982-83). Unfortunately, your lender is correct in the amount of taxes and escrow you will have to pay, although they may be hitting you with one additional month, and you should ask for a full explanation of their figures before you actually go to settlement.
There is one saving grace, however, in that the nine month taxes (October through June) are deductible when you file your tax return next year. The additional taxes held in escrow are not deductible until the year that those taxes are actually paid, which in your case will be September of 1983.
As indicated earlier, this is a very confusing area. Lenders who collect taxes in escrow often have the free use of these funds until the taxes are due and payable. The Maryland legislature has put some consumer protections in this area, by requiring that some lenders will have to pay you interest at passbook rates on the funds which they hold in escrow.
I suggest that you discuss this matter in person with your lender, and demand a full explanation as to how they calculate both the taxes which are due and the escrow which they will want to hold on your behalf.
It is time for the various state legislatures to look at this matter again. It is manifestly unfair for a lender to hold thousands and thousands of escrowed funds and not have to pay any interest at all -- or only a nominal passbook rate -- when homeowners could certainly invest these funds until the taxes are due at considerably higher interest rates.