Tax Service Fee: Meaning, Requirements, FAQs

What Is a Tax Service Fee?

A tax service fee is a legitimate closing cost that is assessed and collected by a lender to ensure that mortgagors pay their property taxes on time. Tax service fees exist because mortgage lenders want to protect their access to collateral if a borrower defaults.

Understanding a Tax Service Fee

Closing costs refer to all the fees associated with buying and selling a home. These fees are typically not included in the mortgage amount and are required to be settled by either the buyer or the seller. In many cases, the closing costs can be negotiated. There are multiple closing charges, one of which is the tax service fee.

By partnering with a tax service agency, a lender runs a thorough background check on a property to determine what tax service fee to assess. The role of a tax service agency is to alert the mortgage company on any delinquent property taxes found in order to prevent tax liens from existing against the mortgagors' homes. 

The state government imposes tax liens and has priority over lender liens. A bank, therefore, seeks to protect its own interests by ensuring that if the borrower defaults on the property, it becomes the owner of the property—not the state. The tax service fee is typically paid by the buyer to the lender at the time the home is purchased. The lender then passes this sum on to the tax service agency on behalf of the new owner.

Information concerning any outstanding taxes on the property is also divulged to the buyer, who can arrange to settle those taxes as part of the purchase. If the previous owner of the property owes taxes on it, the state has the authority to seize the property, even if a bank has a lien on the property as well. Therefore, the tax service agency can help ensure that a buyer is purchasing a property free and clear of any property tax impediments.

Requirements for a Tax Service Fee

The setup for collecting a tax service fee varies. For borrowers with impound accounts, property taxes are collected monthly with mortgage payments. In this case, the tax service agency's job is to provide the lender with the mortgagor’s property tax bills so that they will be paid on time. 

For borrowers without impound accounts, the mortgage company will often remit any unpaid property taxes on behalf of the homeowner and then bill for the sum plus any penalties and fees that may apply. Mortgage lenders are normally required to disclose details about how tax service fees are collected within the area where the property is located and to discuss all options for payment with the borrower.

The Bottom Line

A tax service fee might seem like just another expense you face when closing on a house, but it can save you in the long run. This small fee helps you set up an escrow account to pay your property taxes on time.