Colorado State Real Estate Practice Exam

The settlement worksheet entry for a tax reserve indicates that the lender is withholding money to fund an escrow account. This escrow account is specifically established to ensure that property taxes can be paid on time. When a lender requires a tax reserve, it means they are collecting a portion of the property taxes upfront and setting aside those funds. This allows the lender to manage the risk associated with property tax payments, ensuring that taxes are paid at the right time and reducing the likelihood of tax liens on the property.

When buyers close on a loan, they may find this tax reserve included in their closing costs. It is a common practice in real estate transactions, especially for loans that are considered high-risk from a lender's perspective. This arrangement ultimately provides both security and peace of mind for both the buyer and the lender, as it helps prevent unexpected tax liabilities that could arise if the property taxes are not paid.