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What is a Tax Service Fee?

Malcolm Tatum
Updated May 16, 2024
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Tax service fees are closing costs that are assessed and collected by a lender, as a means of making sure that mortgage holders pay property taxes in a timely manner. Typically, the tax service fee is paid at the time the home is purchased, with the lender routing the tax payment to the proper tax agency on behalf of the new homeowner. This service makes it possible for the new owner to settle any back taxes that may be owed on the property, effectively beginning with no worries of tax liens or similar financial setbacks that could make it difficult for the homeowner to maintain control of the newly acquired property.

As part of the preparation for assessment of a tax service fee, the lender will conduct a thorough check into the background of the property in question. This is usually done through partnership with a tax service agency. The agency investigates the financial background of the property, determining if there are any outstanding property taxes connected with the real estate. This is important, since any tax liens that may arise later would take precedence over any liens the lender may impose if the borrower should default on the mortgage.

The actions of the tax service agency are also to the benefit of the borrower. By uncovering evidence of any back taxes owed on the property, the borrower can arrange to settle those taxes as part of the purchase. Once the lender has determined the exact amount of the tax service fee due, and the borrower has paid the fee, both parties can focus more on the business relationship that exists between the two parties, and not be concerned about actions by local agencies to collect any old property taxes.

The exact structure for managing a tax service fee will vary. In situations where the borrowers have impound accounts, the lender may collect a portion of the property taxes owed on a monthly basis, with a percentage of each mortgage payment set aside to settle pending property taxes. Should the borrower not have an impound account, many lenders will cover the unpaid property taxes on behalf of the new homeowner, then bill the borrower for that amount, including any fees and penalties that may apply.

Laws governing the collection of tax service fees vary somewhat from one nation to the next. Mortgage lenders are normally required to disclose details about how the fees are collected within the area where the property is located, and discuss all options for payment with the borrower. Potential homeowners can also contact local tax agencies to obtain information about how a tax service fee is assessed, and in some cases arrange for payment directly to the agency, without the need for the lender to act as an intermediary.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
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