Tax Service Fee: Meaning, Requirements, FAQs

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

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 lenders want to protect their access to collateral if a borrower defaults.

Key Takeaways

• Tax service fees are part of the closing costs⁠ for a property meant to ensure borrowers pay property taxes.
• The amount of the tax service fee is determined by a tax service agency that thoroughly researches the property and related taxes.
• The lender uses a tax service to prevent a tax lien, which would allow the state to take possession of the property ahead of the lender.
• On the buyer’s side, a tax service agency ensures the property is free and clear from tax impediments.

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.

Tax service fees are one part of closing costs, allowing a lender to ensure that tax liens are not placed on a property due to nonpayment of taxes.

Tax liens are imposed by the state government and have 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.

What Is the Purpose of the Tax Service Fee?

This fee is used to pay your lender to set up an escrow facility to prevent any interruption in property tax payments owed during the time it takes to purchase and close on a property and when the tax bill is due.

How Much Is the Tax Service Fee?

The tax service fee will vary depending on the lender and state you are closing in. These fees are often relatively minimal and can range from around $50 to just over $100.

Do I Have to Pay My Property Taxes With My Mortgage Payments?

Bundling estimated property and school taxes with mortgage payments via an escrow account is common practice that makes it easier for many homeowners. However, you can also request to pay your property tax yourself. Simply notify both your lender and the taxing authority of your decision and where to send the tax bill.