Tax Hold Back
Definition and meaning of Tax Hold Back in real estate.
A tax hold back is an amount of money withheld by a mortgage lender from the loan disbursement at closing to ensure there are sufficient funds to pay upcoming property taxes. This practice prevents delinquent taxes from becoming a lien on the property before the borrower's regular escrow payments have time to accumulate.
In more detail
When a borrower's property taxes are included in their monthly mortgage payments, the lender sets up an escrow account to pay these bills. However, because property tax due dates vary, the escrow account may not have a high enough balance to cover the first tax bill that comes due after closing.
To solve this, the lender calculates a tax hold back based on the closing month and the local tax schedule, withholding that amount upfront. This ensures that the current year's taxes are paid on time while the monthly escrow installments build up the reserve for the next year's bills. Borrowers can see this requirement detailed on their closing disclosures.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Withheld by | Mortgage lender |
| Required at | Loan closing |
| Purpose | Ensures timely payment of upcoming property taxes |
A home buyer closes on their mortgage in June, and because the county property tax bill is due in September, the lender establishes a tax hold back from the loan proceeds to guarantee the September bill is paid.
Frequently asked questions
How does a lender determine the amount of a tax hold back?
The lender calculates the hold back based on the month the mortgage is funded, the local tax billing cycle, and the dates when interim or final taxes are due to the municipality.
Is a tax hold back a fee that I lose?
No, a tax hold back is not a fee, but rather your own money that is deposited into your escrow account and used solely to pay your property taxes.