PITI Essentials: Navigating Principal, Interest, Taxes, and Insurance in Real Estate Downturns

PITI. It might be an age-old real estate acronym, but it is still as important today as ever, especially in times of a downturn in the real estate business cycle.

Breaking Down PITI: Principal, Interest, Taxes, and Insurance Explained

The “P” stands for principal, the first “I” is interest, the “T” stands for taxes, and the last “I” stands for insurance. These four are the foundation every prospective homeowner must consider before purchasing a home because they are the basic costs associated with affording to buy a home in the first place.

The mortgage a homeowner takes out with a lender covers the P&I (principal and interest) part of it. However, in most cases, the lender won’t close on the loan without knowing that the home is covered by homeowner’s insurance (the second “I” factor), so that cost is going to be paid.

The Hidden Pitfalls of Property Taxes and Foreclosures

It’s the “T” (taxes) where a lot of people get in trouble. Next to not being able to afford the monthly mortgage payment (the P&I), people who do not make their regularly scheduled semiannual property tax payment are in danger of losing their home to foreclosure and don’t even know it.

In an economic environment where people are losing their jobs, foreclosure numbers are rising, and bankruptcy is rearing its ugly head, most homeowners know they can lose their home to foreclosure by defaulting on their monthly mortgage payments. And they may even know that the insurance company who wrote their homeowner’s policy has no power to foreclose on them.

However, what they may not know is that the government can record a tax lien against title to their property for non-payment of taxes (either real estate or personal), and if those taxes — plus penalties and interest — are not paid in a designated amount of time, then like any other lienholder against the property, the taxing agency of the government can foreclose on the home and sell it to pay off the taxes owed.

Understanding Tax Foreclosures and Auctions

The procedure by which these tax foreclosures are sold off can vary from the federal and state level to the county level.

As the taxing agency of the federal government, the Internal Revenue Service has complete power to record a tax lien against real and personal property owned by delinquent taxpayers as security based on income taxes owed.

A Notice of Federal Tax Lien will be filed against the taxpayer’s property only after the IRS assesses the liability, sends out a Notice and Demand for Payment, and the taxpayer neglects or refuses to pay the full amount within 10 days of notification.

As to real property, the IRS does sell homes it has seized for non-payment of taxes itself. To do so it holds tax foreclosure auctions that are announced online at treas.gov. Check out the site for more information on participating in an IRS tax foreclosure auction.

Depending on the individual county, tax foreclosure auctions can be called anything from “Property Tax Foreclosure Sales” or “Tax Foreclosure Sales” to “Property Tax Foreclosure Auctions.”  In the end, they all mean the same thing.

Different local governments can call them by different names, but the process is basically the same, and so is the result. A home that was foreclosed on for delinquent property taxes is being sold.

Information on tax auctions is readily available in many counties through their websites including when the auctions are held and the procedures to follow in order to bid on those properties.

Although foreclosure is a process conducted at the county level, sometimes the state even publishes the basic procedures by which states foreclose under the state’s own foreclosure law. Take for example, the State of Oregon.

All it takes is some research on the Internet to locate tax foreclosures in most areas of the country. The best part of purchasing a tax foreclosure is finding one that can be bought for pennies on the dollar compared to the more traditional way of buying a home or the more common ways of hunting for a bargain through foreclosure.

When you look at the local county websites one thing you will notice, for the most part, is there are fewer homes that go to foreclosure for unpaid taxes than for mortgage default.

So, the downside then of purchasing a tax foreclosure property is locating them in the first place. Even then, like with other types of real estate auctions the toughest part is being the successful bidder — if you decide to participate in the auction — and instead making sure you walk away with the confidence that you got a good deal.