Bauhaus, Home Buyer in Philadelphia, PA

I need to better understand how prorating seller's RE taxes and home insurance paid during the year affects what the buyer pays at closing.

Asked by Bauhaus, Philadelphia, PA Sat Mar 26, 2011

Specifically, what's the starting point for prorating seller's RE tax and home insurance costs. I'm a first-time buyer w/ no direct experience here. In Phila. when does the seller typically pay these costs during the year? Is it full payment for the year past - or the year forward? Are there installment payments for the year forward? As I run through some buying scenarios relative to my savings (for down payment and closing costs) I want to be able to more accurately predict what I'll pay at closing for those two expenses. Also, exactly how does escrow apply to this scenario?

Last, is there a significant difference in how this would play out in Cheltenham Township (Wyndmoor/Glenside/Elkins Park) vs. Mt. Airy/Chestnut Hill? I'm considering arriving at something with 285K sales price, 10K down (3.5%, FHA, w/ 725 FICO) but would necessarily like to keep closing costs to a minimum.

If you have a website that details typical closing costs for Phila. and how it works, I'd like to read it.

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Good morning,

In general, here is a typical scenario for your question:

1) In Pa., both county and local (municipality) taxes are considered "calender" taxes. Thus, If you settle on any property, say on June 30th, you'll pay, at closing, these taxes from that day until 12/31. Why, because these taxes are typically paid by the seller in early Spring. A quick eg.- Sellers' home has $1,200 annual county tax. He paid the bill in, approx., March. What he did was pay both backward, from jan. 1st, and forward, to 12/31. So, with a 6/30 settle....you'll pay 6 months of this tax, or $600, in essence paying back the seller for tax paid....your next bill will come next spring.
2) School tax is typically a "fiscal year" tax, running July 1 to June 30 of the next year. So...using the above settle date of 6/30...you essentially won't pay the seller back for any school tax. Why? At that day, the seller, if he/she is up to date, will only have paid through 6/30...the next bill, again paying back and forward, will be received in the fall (paying back from 7/1 through 6/30 of the following year. Now, in this scenario, a bit of a catch....YOU will be receiving the next school tax withing 2-3 months of settlement...and will owe from 7/1 through 6/30. So...the title agent, or settlement co., may require you to FUND your escrow account sufficiently, at settlement, to be able to draw those school taxes when they come due.....which leads to your question of escrow.

3) Escrow is what I call the dirty secret of lenders. At settlement, an escrow accout will be established with a certain amount of money. This money will be held by the lender and paid out as taxes, and insurance bills, come due (by the way, typically, you'll pay a full years' home insurance prior to settlement) As you begin to make your mortgage payments, a portion of all of your taxes and insurance, will be added to that payment (base payment being principal and interest). No interest is accrued for you to have the escrow acount sitting with the lender. The argument from them is that there are adminstrative costs associated with disbursing this money....O.K...

Finally, banking regulations allow only a certain amount of escrow to be held at settlement (I believe, but am not certain...14 mo.) To get a firm idea about ALL of the costs involved with your purchase, I urge you to contact a lender, get pre-approved through that lender, and provide details about the home you wish to purchase, including price, total taxes, any monthly recurring HOA (home owners' association, if applicable). Ask the lender for wht is know as a Good Faith Estimate, or GFE, for that property. He/she will provide definitive data for you to review...all at no charge or obligation (they do this to help them secure your business) Also, Realtors in Pa. are required to provide an estimated closing cost sheet to their buyers. As your Realtor for one. There are a lot of considerations aside from these I've outlined, but hopefully this will get you started.
1 vote Thank Flag Link Sun Mar 27, 2011
In Phila the RE taxes are paid on a calandar basis. Typically, a buyer always needs 12 months of real estate tax plus one to two additional month tax into the lender escrow account, depending on what month of the year the settlement date is. The home insurance is sort of the same. At time of closing you will need a paid up insurance policy for 12 month from the day of settlement. The lender will generally take an additional month of insurance cost to the escrow account. These additional months escrow for tax and insurance are so that the lender can pay the next tax bill and the next renewal of the home insurance a month or so earlier then the actual due date. If they did not take additional escrow they would not have enough funds in the escrow account until the bills were actually due and because they try to get any discount for early payment on your behalf and being that they are servicing hundreds and thousands of loan accounts, they need the extra time to properly account and disburse payments.

Therefore,it really does not matter when you complete a closing. The adjustments will always be treated the same way. Does not matter if you are in Phila or Cheltenham townships. Proration of escrows will be the same. The only way to keep closing cost at a lowest amount is to settle at the end of the month because of the interest on the mortgage to the 1st payment. This does not save you one penny but would allow you to have less funds needed for closing but then the first mortgage payment would start 30 days after the date of settlement..
2 votes Thank Flag Link Sat Mar 26, 2011
At the risk of revealing I'm missing something that's very obvious, why the requirement for one year of RE taxes and homeowners insurance at closing if PITI includes a monthly payment for both RE taxes and homeowners insurance, and there's also at least two months of each in escrow?
1 vote Thank Flag Link Sat Mar 26, 2011
It is important info for the buyer to know how much cash they will need. Let's say the taxes are 5000 and also let's assume taxes run 1/1-12/31. If settlement is 6/30 buyer will need to pay seller 2500 more than the purchase price provided seller already paid tax bill for calander year. Its simple in philadelphia county. In the suburbs and nj its done differently as school taxes and prop taxes aren't on the same bill and aren't due on the same dates. Its also a question of when your insurance gets paid for this year and the next year. Your lender will also make you "escrow' both. At settlement, you pay taxes and insurance for the remaining part of the year you buy and start paying for next years taxes. While it feels like you are paying twice, you actually are not. Some day you will also be a seller and will get the "paid taxes back" and prepaid insurance refunded.
1 vote Thank Flag Link Sat Mar 26, 2011
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