Property Tax Proration VA Guidelines On VA Home Loans
This Article Is About Property Tax Proration VA Guidelines On VA Home Loans
There are certain states where property taxes are paid in arrears.
- States where property taxes are paid in arrears requires that sellers credit buyers with the prior year’s taxes at closing
- This is called property tax proration credits
- Every loan program has property tax proration guidelines
- Property Tax Proration on VA Loans allows buyers to walk out with cash at closing from their proration credits due to them
- Property Tax Proration on VA Home Loans is different than other loan programs
- Property Tax Proration on VA Mortgages allows home buyers to walk out with cash at closings from their property tax proration credits
- Unlike Property Tax Proration VA Guidelines, FHA, USDA, and Conventional Loans require any proration credits more than the amount of earnest money check needs to go to principal reduction
We will cover more on Property Tax Proration VA Guidelines and how it is different than other loan programs on this article.
States Where Property Taxes Are Paid In Arrears
Not all states have their property taxes paid in arrears. Only several states require property tax proration credits by sellers to credit buyers.
Since Gustan Cho Associates is headquartered in Illinois, we will take a case scenario on how property tax prorations work.
- Again not all states have homeowners property taxes paid in arrears
- Illinois is one of the states that does
- Lets take an example a home buyers buys a $200,000 home with a VA Loan
- Property taxes are $10,000 per year
- Lets say borrower gets a 4% sellers concession which is $8,000
- Actual closing costs is $6,000. Gustan Cho Associates is a direct lender with no overlays on government and conventional loans
- So there is no minimum credit score nor DTI cap requirements with us
- Borrower got an approve/eligible per automated underwriting system with a 540 credit score and 60% debt to income ratio
- Borrower got a higher rate of 5.5% due to loan level pricing adjustments due to his low credit scores
- VA offers 100% financing so no down payment is required
- Closing costs is $6,000 so there is no closing costs
- The $2,000 overages in sellers concessions is used to buy discount points to lower his 5.5% interest rate to 5.25%
- He needs to bring zero to the closing table
- However, due to Property Tax Proration VA Guidelines, the sellers owes borrower the previous year of taxes which is $10,000
Due to Property Tax Proration VA Guidelines, home buyers walks out with a $10,000 check after closing.
Property Tax Proration VA Guidelines Versus FHA USDA And Conventional Loans
Home buyers cannot walk out with cash with property tax proration credits on FHA, USDA, and Conventional Loans. The only way borrowers can walk out with cash is if they have put down sufficient earnest money deposit. This topic can get quite confusing so lets take the above case scenario.
- Buyers buys a $200,000 home with $10,000 tax proration credits
- Puts down $1,000 earnest money
- Has enough closing costs by sellers in sellers concessions so no money out of pocket
- Needs 3.5% down payment due to FHA down payment requirements or $7,000
- Borrower will get $1,000 earnest money credited towards down payment so the amount needed would be $6,000
- Borrower has $3,000 in cash credit from proration credits PLUS $1,000 credit from earnest money for a total of $4,000
- FHA, USDA, Conventional Loans does not allow borrowers to walk away with $3,000 cash at closing
- The $3,000 will be applied toward principal reduction of the borrower’s mortgage loan balance
- Borrower will get the $1,000 earnest money back and/or credited towards the down payment
However, if borrower were to put $4,000 in earnest money versus $1,000, borrower can walk away with cash from the property tax proration credit. Borrowers with more questions on Property Tax Proration Guidelines On VA Loans and other loan programs, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at [email protected]