This BLOG On How Underwriters Calculate Property Taxes On New Construction Homes Was PUBLISHED On November 10th, 2020
Many home buyers are gravitating towards new construction homes offered by builders.
- The final property tax numbers will not be known until the community has been fully developed
- However, mortgage underwriters will need to determine a number when qualifying and underwriting the borrower
- Property tax calculation is easy on pre-existing homes
- However, estimated property taxes will need to be used on new construction homes
- Underwriters want to make sure they do not underestimate property taxes on new construction homes
- The ability to repay the new housing payment is the main focus of the mortgage underwriter
High property taxes on new construction homes will have an impact on the borrower’s ability to repay if the borrower has higher debt to income ratios.
How Property Tax Numbers Are Derived On New Construction Homes
- Purchasing new construction homes is much different than buying pre-owned homes when it comes to property taxes
- The way how mortgage underwriters calculate property taxes on new construction homes may impact buyers with higher debt to income ratios
- Property taxes on new construction homes are normally much higher than taxes on pre-owned homes
- Underwriters count on historical numbers when it comes to property taxes
- Without historical figures, what is the number to use the proposed property taxes as part of PITI?
We will cover this topic on how mortgage underwriters calculate property taxes on new construction homes on this blog.
How Do Underwriters Calculate Property Taxes On Brand Newly Built Homes
All mortgage underwriters are very careful when calculating property taxes on new construction homes with no prior property tax history:
- We will show you how underwriters calculate property taxes on new construction homes
- We will cover the worst and best case scenarios
- Property taxes on new construction homes often stresses home buyers
- Most home buyers have a specific budget on their monthly housing payments
- Principal and Interest is fixed and so are property taxes on pre-owned homes
- However, the potential uncertainty on property taxes on new construction homes often adds stress in the home buying process
Property taxes on new construction homes can change in the future.
Property Taxes Explained
All counties in the United States levy property taxes on real estate properties.
- All homeowners are required to pay property taxes
- There is no set formula on how much homeowners pay
- Every local government entity, city/town, and county assess taxes differently
How underwriters calculate property taxes on new construction homes is through the millage for the area the home is located.
Millage Rate is the real estate tax that is due per $1,000 in assessed value and is presented as a percentage.
Let’s take a case scenario:
- If a home is valued at $400,000 and the mill levy (the millage rate) is set at one percent, multiplying the assessed value of $400,000 by 0.1% will yield $4,000
- The $4,000 a year will be the millage tax rate
- There can be additional taxes besides the millage property taxes
- Special assessments can also be required by the township, town/city, county, and school districts
- Some areas with the top school districts often have higher tax rates than other municipalities and/or townships
- Property Taxes on new construction homes in areas with top school districts may require an additional 1.0% school district tax and another 1.0% township tax
So the estimated property taxes on new construction homes in this area will be the sum of the mill levy plus the school district, plus the township tax: 1.0% mill levy + 1.0% school district + 1.0% township taxes which yields 3.0% or $12,000 on a $400,000 assessed new construction home purchase.
Assessing Value Of Property
Most homeowners do not have any idea on how their property is given an assessed value.
- The assessed value of a real estate property is the determinant on how much the property taxes are assessed
- It is also the determinant on whether or not homeowners deserve an increase or decrease in their real estate taxes
- The assessor of the local government municipality is the officer that determines assessments
- The assessors office determines the real estate assessment using a number of factors
- Assessors will determine the assessed value of a home after using comparable properties in the area
The assessors assessed value is what determines property taxes on individual homes.
Comparable Properties To Determine Property Taxes
The starting point on how county real estate assessors examine in assessing homes is by examining like and similar properties to the subject home.
- This can be a no brainer in a subdivision where there are many similar type model homes
- However, free standing homes not in a subdivision can be more tricky, especially custom homes
- These homes are different than other homes in the area
- There are no two exact same properties
- Homes with the same square footage with the same amount of bedrooms and bathrooms may have unique and distinct features such as brick versus frame, and major material differences in interior and exterior materials used
How Assessors Compare Assess Homes
Lets take an example of two homes:
- Each home is built on a standard 0.25 acre lot
- Both homes are 2,000 square feet
- Both homes have three bedrooms, two baths, two car attached garages
- However, home number one cost $200,000 to build and the second home cost $500,000 to build
- The second home has top of the line exterior brick, custom millwork, pond with waterfall, top of the line appliances, top of the line kitchens/bath, finished walkout basement
So is the second home assessed at a higher value than the first comparable home under the assessors eyes? The assessor does not care about the bells and whistles the home has. Home Assessment is based on the square footage, bedrooms, bathrooms, and lot size.
Assessment On Rentals Versus Owner Occupant Homes
Not all single family homes are owner occupant homes.
- Many homeowners do not necessarily sell their owner occupant homes when they upgrade to a larger home
- They may decide in keeping their exiting home as a rental
- Or homeowners who recently purchased a home may get a job transfer to another state without notice and may need to rent out their owner-occupant home
- There are homeowners who rather rent out their exiting home and keeping it as an investment home than selling it
- County Assessors can use the income assessment method on investment rental properties
- Way on how the income assessment method works are it takes into consideration on what the property owner makes after they have satisfied maintenance and other costs of the rental property
- The assessment value of the subject income property is derived after the assessor analyzes the investment property
Investment property owners normally pay higher property taxes than owner occupant homeowners.
Contesting Property Taxes On New Construction Homes
Home Buyers who are purchasing a pre-owned home which is an investment property will have higher property taxes.
- Mortgage underwriters will calculate the higher tax amount when calculating borrowers debt to income ratios
- However, once home buyers move in on their home purchase, they can claim owner occupant and get the taxes reduced
- Owner occupant tax rates are significantly lower than investment tax rates on real estate
- However, it does take time
- There are many counties where they exempt property taxes from disabled veterans
Homeowners who think they are paying higher property taxes than their neighbors can always contest their property taxes. There are many attorneys who specialize in property tax appeals. No money upfront is needed. Attorneys will charge a percentage of the savings.
Property Taxes On New Construction Homes Versus Built Homes
Paying property taxes is part of homeownership. Homeowners who have their homes paid for with no mortgage still need to pay real estate taxes for as long as they own their homes. All government loan programs (FHA, VA, USDA) require property tax and insurance escrows. Conforming Loans allows homeowners to pay their real estate taxes on their own if they have more than 20% equity where no escrow is required.
Qualifying For Mortgage With Direct Lender With No Overlays
Home Buyers of new construction homes who need to qualify for a mortgage with a direct lender with no overlays can contact us at GCA Mortgage Group at 262-716-8151 or text us for a faster response. Or email us at firstname.lastname@example.org. Over 75% of our borrowers are folks who were turned down by other lenders due to their mortgage overlays. We are available 7 days a week, evenings, weekends, and holidays.