In this blog, we will cover and discuss the updated mortgage guidelines on property tax prorations. The recently updated agency mortgage guidelines on property tax prorations allow homebuyers to be able to use property tax prorations by sellers for the down payment on their home purchase. HUD, VA, USDA, Fannie Mae, and Freddie Mac agency guidelines on property tax prorations were updated recently that property tax prorations can be used for the down payment on a home purchase in property tax proration states. In the following paragraphs, we will be covering the mortgage guidelines on using property tax prorations for te down payment in this blog.
What Are Property Tax Prorations?
New mortgage guidelines on property tax prorations were implemented for home purchase transaction down payment requirements for states with property tax prorations.
Mortgage guidelines on property tax prorations state that in certain states such as the state of Illinois where property taxes are paid in arrears, property tax prorations can be used towards the down payment on a home purchase.
How Does Property Tax Prorations For Down Payment Work?
Let’s take a case scenario of a borrower with an FHA loan.Even though the property tax prorations credit can be used for the down payment on a home purchase, the borrower still needs to show they have the down payment in their bank or asset account. The mortgage loan borrower needs to show the 3.5% down payment of the home purchase in their bank account. Cannot use the property tax prorations as verified funds.
For example, on a $100,000 home purchase, the borrower needs to show 3.5% of the $100,000 purchase price in their bank account or $3,500.
Can I Use Property Tax Prorations For The Down Payment on Home Purchase?
Home buyers can use property tax prorations on the down payment on a home purchase. However, the down payment needs to be verified other than the property tax proration.
In the above example in the previous paragraph, the $3,500 needs to be verified by the mortgage underwriter prior to the underwriter issuing a clear to close. Any shortage of funds to close needs to be addressed before the mortgage loan underwriter will issue a clear to close. In this article, we will discuss and cover the agency mortgage guidelines using property tax prorations for the down payment for a home purchase.
Property Tax Prorations on Home Purchase In Illinois
In states where property taxes are paid in arrears, such as Illinois, the home buyer may have the prior year’s property taxes that are due to them at closing by sellers. In the above example, if the property taxes on the $100,000 home purchase were $3,000, the home buyer was due the $3,000 property tax prorations. Then mortgage guidelines on property tax prorations state that the $3,000 in property tax prorations can be used towards the down payment on this home buyer’s home purchase.
What Can Property Tax Prorations Be Used For?
The net due at closing on this home purchase is $3,500 less the $3,000 in property tax prorations or $500. The home buyer needs to come up with $500 at closing for his or her down payment plus the closing costs. Home Buyers can use property tax prorations for closing costs as well in the event that they have the property tax proration credits left over after applying for their down payment.
What Can Seller Concessions Be Used For?
Seller concessions cannot be used for the down payment payment on a home purchase. Seller concessions can only be used for the closing costs on a home purchase. Closing costs can be paid with seller concessions or lender’s credit closing costs. We will cover seller concessions in the next paragraph extensively and in detail. Lenders’ credit towards closing costs is when the mortgage lender will credit home buyers part or most of the closing costs in lieu of the mortgage loan borrower getting a higher mortgage rate.
Using Property Tax Prorations For Down Payment and Closing Costs
Property Tax Prorations allow home sellers to give home buyers seller concessions so the home buyer can cover most or all of the home buyer’s closing costs. FHA allows up to 6% of seller concessions credits by home sellers to offer to home buyers for their closing costs. Seller concessions cannot be used for the down payment on a home purchase. Seller concessions can only be used for closing costs. There are two types of costs involved in a home purchase. Down payment on a home purchase and closing costs.
Typical Closing Costs
Closing costs on a home purchase include the following:
- loan origination fees
- credit-reporting fees
- title charges
- homeowners insurance
- attorneys fees
- inspection fees
- other third-party charges that a home buyer may occur in the home-buying process
What Can Seller Concessions Be Used For
Homebuyers can also use seller concessions to buy down mortgage rates by buying points. Home Buyers cannot have seller concession overages. Seller concessions overages need to go back to the home seller. Home sellers cannot give a kickback on seller concession overages.
Can I Buy a House With No Money Down Using Property Tax Prorations?
Homebuyers purchasing a home in a state where property taxes are paid in arrears like the state of Illinois may be able to purchase a home with an FHA loan with very little or no down payment and no closing costs. This holds true if buyers have enough property tax proration credits and seller concessions.
The team at Gustan Cho Associates closed many home loans where the home buyer did not have to bring any money to closing. Many of them got cash back at closing along with the keys to their homes. Remember that in states where property taxes are paid in arrears, buyers can use the property tax prorations for the down payment on the home purchase.
If the property tax proration credits are greater than the down payment required, then buyers will get the difference back in cash. All closing costs can be paid with seller concessions and/or lender’s credit toward home buyers closing costs.
How Property Tax Prorations Benefit Buying Homes In Illinois
The benefit of buying homes in Illinois is Illinois home buyers get property tax prorations. Sellers owe buyers one year’s property tax proration credit at closing. This is due to property taxes being paid in arrears. Home Buyers who need to qualify for a mortgage in Illinois with a national mortgage company licensed in 48 states with a network of over 190 wholesale mortgage lenders with no overlays on government and conventional loans, contact us at Gustan Cho Associates at 800-900-8569. Or text us for a faster response. You can also email us at gcho@gustancho.com. Gustan Cho Associates has no lender overlays on FHA, VA, USDA, and Conventional loans and hundreds of non-QM and alternative mortgage lending options on primary, second homes, and investment properties.
November 6, 2022 - 5 min read