Assume a mortgage requires $1800 a month, principal and interest. It also requires $400 a month tax escrow, for a total of $2200. One of the spouses loses their job and they can only afford to send the bank $1500 per month. Does the money still go into the escrow account and the mortgage is short $700, or is the payment apportioned between bank and tax escrow?
One of the replies here may addresss your question.
The pertinent comment states:
Having just gone through refinancing recently, I believe that your note from the bank will detail exactly how partial payments are applied, and in what order. In general, late fees are paid first, and the loan principal is paid last, IIRC.
The bank is collecting money to pay the taxes on the house. When it’s time to pay the tax (twice a year where I live) the local government isn’t going to take “don’t have the money” for an answer. So, in the OPs case, the money has to go toward the taxes eventually. Banks are allowed to collect more than the minimum required for taxes, so they have some wiggle room, but that can’t go on for long.
As folks have mentioned, the papers will detail how payments are applied. I’m a bit surprised that they would pay the late fees first. Taxes will always have priority over the mortgage, and failure to pay them can lead to a foreclosure that would leave the bank with nothing except maybe a deficiency judgment, if it’s not a non-recourse state.
I think you are mixing up two different things. The bank will likely keep paying the property taxes, to protect their investment, regardless of any partial (or non-existent) payments made by the borrower.
However, any partial payment the borrower makes is first applied to late fees and penalties, and only after all outstanding fees, escrow, and interest is paid will anything be applied to the loan principal.
^This