I'll get back to my Top 10 List soon, but I want to address something that seems to be happening all too often right now with property taxes. Specifically, with transactions that closed from October-December 2011.
Here in Texas, property taxes become due & payable October 1 for the current tax year. So 2011 tax bills came out in October. We, the title company, are required to guarantee on most title policies that property taxes are paid current and no tax bill is outstanding. In October we started collecting for those 2011 bills and mailing tax payment checks to the tax offices after funding. If it's a sale transaction we are collecting from the seller, and on a refinance we collect from the owner/borrower.
At the same time, lenders (the ones originating the new loan for the borrowers) are putting about three months (sometimes more, sometimes less) of tax escrows into the reserve account in anticipation of the 2012 tax bill later this year. They state in their closing instructions to us (the instructions that give us their requirements for closing the loan and issuing the lender's title policy) that they want the taxes guaranteed through 2011 (for loans closed October 1, 2011, or later). We are obligated to pay them and guarantee them as paid in full.
What has happened on some of my files is the new lender (the one who only put +/-3 months of tax escrows in the borrower's reserve account) is paying the 2011 tax bill out of that escrow account, causing a significant escrow shortage. This is the same tax bill we just paid at closing. Now the borrower is going to get a bill from their lender because the escrow account was overdrawn, and I'm getting a document from the tax office to apply for a refund. Frustrating!
I'm sure this is causing people panic when they open a letter from their current mortgage servicer and find out they owe a few thousand dollars because there wasn't enough money in their escrow account to pay the taxes. Of course there wasn't--the lender only escrowed a few months and expected that we would pay the entire tax bill that was due.
Why this is happening is beyond me. But if you get a letter about an escrow shortage and you just purchased or refinanced your property in the last few months, verify with the title company before you panic.
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Thursday
Top Ten: #9 What is an R8 credit and how is it calculated?
It is often hard for a borrower to stomach the fact of having to pay closing costs again to refinance their property when they just purchased it a couple of years ago. They probably already paid a loan origination fee, appraisal fee, flood certificate, and title insurance premiums, so it is not fun to think about having to put out money for those things again. Fortunately, in Texas, there is one rate rule available to us that allows for a reduction in the premium for the title insurance policy that the new lender will require.
The R8 credit rule states that a discount is to be given on the Mortgagee's Title Policy (MTP) premium if the new loan is to fully renew and extend an existing lien for which a title policy was already provided, and that loan was less than seven years ago. The credit decreases as time passes, and after seven years no credit is allowed to be given. So basically, if a loan was originated, closed and funded less than seven years ago, and it's being refinanced and fully paid off by a new loan now, a credit should be given.
The credit amount is a sliding-scale:
If old loan is less than 2 years old the discount is 40%;
If old loan is more than 2 years but less than 3 years old, the discount is 35%;
If old loan is more than 3 years but less than 4 years old, the discount is 30%;
If old loan is more than 4 years but less than 5 years old, the discount is 25%;
If old loan is more than 5 years but less than 6 years old, the discount is 20%; and
If old loan is more than 6 years but less than 7 years old, the discount is 15%.
But a common misconception is that the credit is based on the new loan amount. Many people think that if a loan amount is $100,000 (base premium being $843) and the loan being paid off is between 3 and 4 years old, that the 30% discount is off calculated on the $843. That's not the case. The discount is based on what the premium would be for a policy issued in the amount of the payoff of the old loan. Here's a breakdown:
New loan amount is $100,000.
MTP Premium (before endorsements) for a $100,000 policy is $843
Loan payoff is $95,000 (MTP premium for a $95,000 loan would be $811)
Old loan originated more than 3 years ago, but less than 4 years ago, so discount is 30%
Take the $811 x 30% = $252.90 <<< this is the amount of the discount given
Now you take the $843 and reduce it by the $252.90
So new policy premium, before endorsements, is $590.10
This worksheet has been helpful to me whenever I've had to calculate R8 credits by hand. By the way, the credit is even available when doing a home equity loan.
So now you know!
The R8 credit rule states that a discount is to be given on the Mortgagee's Title Policy (MTP) premium if the new loan is to fully renew and extend an existing lien for which a title policy was already provided, and that loan was less than seven years ago. The credit decreases as time passes, and after seven years no credit is allowed to be given. So basically, if a loan was originated, closed and funded less than seven years ago, and it's being refinanced and fully paid off by a new loan now, a credit should be given.
The credit amount is a sliding-scale:
If old loan is less than 2 years old the discount is 40%;
If old loan is more than 2 years but less than 3 years old, the discount is 35%;
If old loan is more than 3 years but less than 4 years old, the discount is 30%;
If old loan is more than 4 years but less than 5 years old, the discount is 25%;
If old loan is more than 5 years but less than 6 years old, the discount is 20%; and
If old loan is more than 6 years but less than 7 years old, the discount is 15%.
But a common misconception is that the credit is based on the new loan amount. Many people think that if a loan amount is $100,000 (base premium being $843) and the loan being paid off is between 3 and 4 years old, that the 30% discount is off calculated on the $843. That's not the case. The discount is based on what the premium would be for a policy issued in the amount of the payoff of the old loan. Here's a breakdown:
New loan amount is $100,000.
MTP Premium (before endorsements) for a $100,000 policy is $843
Loan payoff is $95,000 (MTP premium for a $95,000 loan would be $811)
Old loan originated more than 3 years ago, but less than 4 years ago, so discount is 30%
Take the $811 x 30% = $252.90 <<< this is the amount of the discount given
Now you take the $843 and reduce it by the $252.90
So new policy premium, before endorsements, is $590.10
This worksheet has been helpful to me whenever I've had to calculate R8 credits by hand. By the way, the credit is even available when doing a home equity loan.
So now you know!
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