What is the significance of a tax reserve in loan closing?

A tax reserve is an important component at loan closing because it is set up to ensure that property taxes are paid on time. This reserve acts as a safeguard for the lender, who wants to minimize the risk of tax liens that could take precedence over their mortgage in case the borrower fails to pay property taxes.

By collecting a portion of the property taxes in advance, often as part of the monthly mortgage payment, the lender accumulates funds that will be used to pay the property taxes when they are due. This process helps prevent any lapses in tax payments, which can lead to loss of ownership or financial penalties for the borrower. Ultimately, a tax reserve provides peace of mind for both the lender and the borrower, ensuring that the property remains free from tax-related issues throughout the life of the loan.