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Paul Premack, Express-News Banner

San Antonio Express-News
Copyright 2010, Paul Premack
January 1, 2010

Deferral of Property Tax may Violate Agreement

Dear Mr. Premack: I am considering deferring my local property taxes. I still have a mortgage on my house, and when I asked the bank about tax deferral they told me that they do not honor this law because of the risk involved should I die. But I think that if they do not get a tax bill then they have nothing to pay. They tell me that I would still need to pay the amount due on my taxes into escrow, but I figure they’ll refund the money to me after analyzing my escrow. Can the bank refuse to follow the law? Years ago I was in the mortgage business, so I understand mortgages and loan servicing. – AK


The tax deferral that you are seeking is authorized under section 33.06 of the Texas Tax Code. The law applies to the county appraisal district and to taxpayers who are age 65+. It allows you to file a form that makes it legal to delay paying property taxes on your homestead.


When you file for deferral, you still owe the taxes. There are no penalties during the deferral, but 8% interest accrues on the tax arrearage. While a proper deferral stops the tax authority from bringing a collection lawsuit until you no longer own or occupy your homestead, they can still place a tax lien against your home.


This is where your mortgage comes into play. When you purchased your home, you borrowed a large part of the funds necessary to pay the seller. In exchange for the loan, you made a promise to repay the debt with interest, and you granted the Lender a lien against your home. The contract granting that lien is called a “deed of trust”. You signed the deed of trust and agreed to all of its terms as a precondition to the extension of the loan.


In the deed of trust, you agreed to perform certain tasks. The most fundamental are 1) to make your note payments, 2) to keep the property insured against casualty like fire, 3) to pay your taxes, and 4) to do nothing that would put the Lender’s lien against your home at risk. If you fail to perform those tasks, you are in default. The deed of trust lists the Lender’s remedies if you go into default, and of course the most severe remedy is to foreclose on your home.


You may legally file an application with the Appraisal District to defer your taxes, but if you chose to do so then you are violating your agreement with your lender. Standard deed of trust wording says “Borrower shall pay all taxes, assessments, charges, fines, and impositions attributable to the Property which can attain priority over this Security Instrument.”


The Agreement also says “If Borrower fails to perform the covenants and agreements contained in this Security Instrument … then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property…” That means that if you do not pay your taxes, the Lender may do so on your behalf, adding the amount to your existing debt and charging you interest. Understandably, most banks and mortgage companies do not want to invest additional funds into your home, especially at a time when you are refusing to pay your taxes.


If the Lender decides not to pay the taxes for you, then the Lender can notify you that your are in default for failure to pay your taxes. The entire note balance can be called due in full immediately, and if you do not remedy the situation, the Lender can foreclose on your home. 


You said in your letter that “if they do not get a tax bill then they have nothing to pay”. Your focus is in the wrong place. It is true that they will not get a tax bill, but it is also true that when you file to defer your taxes the Appraisal District has a lien against your home that takes priority over the Lender’s lien. You have agreed in the Deed of Trust to maintain the Lender’s lien as the first lien, so while the deferral is perfectly legal in the eyes of the Appraisal District, it still violates your Agreement with the Lender.


If you still pay your taxes into escrow, the Lender won’t refund them to you; rather, they will use the funds to pay your taxes. So you don’t save anything and you don’t get a refund. By having a mortgage on the property, you have legally waived the benefits of the tax deferral that is otherwise available to those who are 65+ and own their homes outright.

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Disclaimer: This column answers a specific legal question asked by an individual in Texas. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice, as it may not meet your individual needs. It may give you a solid basis for discussion with your own attorney.  You should consult with your personal attorney before you take any action on this or any legal issue. Also, please be aware that laws change, so  this column is valid only as of the date it was published. This communication does not create an attorney-client relationship between the author and the reader.


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