How Underwriters Calculate Property Taxes On New Construction Homes

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

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.

Case Scenario

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

Comparable Properties To Determine Property Taxes

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

How much are property taxes on new build 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 gcho@gustancho.com. 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.

13 Comments
  1. Sharon McDonald says

    I have a voluntary marriage separation agreement stating $1150 month child support $600 alimony for next 7 years minimum with 2 months of bank statements showing payments electronically made. Can I use the $1750 as repayment info? Can I gross it up to $2137??

  2. Julie Harper says

    Hello to the team at Gustan Cho Associates

    I am a first time home buyer in Michigan who is currently working with a lender who was able to get me a TBD FHA approval for $350,000 @2.75% (max FHA loan plus 5.5% down payment). That approval expires 11/14/20. I have made several offers on homes within the last 3 months and been turned down. While I don’t know for sure, I suspect being a FHA borrower has had some impact on those decisions. I really would like to go conventional and need to be closer to $375,000. My lender says that she cannot get me approved for conventional because of my DTI (her max is 45%) and the late payments on my auto loan (they consider last 12 months payment history, not last 24 months). Currently on my credit report, over the last 12 months I have a 30 day late in November 2019, December 2019, January 2020 (I was finishing my PhD and money was tight so things fell behind and it took some time to catch up). After February 2020 and beyond payments have all been on time. As my approval is expiring and getting a new approval will require a credit check, my current lender suggests that I wait until February 2021 to reapply for a mortgage since the late payments will have fallen off my credit. Furthermore, my lender is doubtful she will get me approved for conventional at that time because she says she currently cannot get conventional approvals for her clients that have credit scores over 700, clean report, and 6 months reserve. I don’t know if that is because of overlays but from all the videos I have watched, it seems like you guys are problem solvers so I wanted to reach out and hear your thoughts, possibly consider bringing my business to you. I am hoping to buy sooner rather than later and I hate the idea of waiting until January. But I also hate the idea of running my credit again right now for a preapproval only to find out that I can still only qualify for an FHA loan. Furthermore, I have not been thrilled with the service I have gotten with my current lender so it seems like even more reason to shop around for a new lender. Below are some details about my financials and credit file. I understand that it is hard to give clear cut answers without my credit report but I am hoping by sharing this you can advise me.

    Current income:
    $104,000/yr (increasing to $106,080 effective 11/22/20)
    **On top of that base salary, I do receive shift differential approximately $6,000/yr however that has only been going on 15 months**

    Debts:
    Ally Financial (auto loan) $870/mo
    Student loans $124,359
    *Currently in deferment not because of Covid but because payment doesn’t start until 07/2021*
    *I am willing to start paying these immediately if necessary to qualify for conventional loan. Fully amortized payment (not income based) will be $797/mo*

    Savings:
    Bank account: $23,000
    Retirement savings I can borrow from: $4,000
    Buyer’s Commission approx. $10,800
    *My husband is my agent and his brokerage is waiving commission therefore we are asking that 3% buyers commission go toward down payment/closing costs*

    Credit score 675-690

    So here are my questions:
    1. Do you think there is a possibility that you can get me approved for a conventional loan @ $375,000 considering the 3 late auto loan payments in the last 12 months?
    2. If not, do you think that once the late payments fall of in January do you think you will be able to get me approved for conventional?

    I apologize for the lengthiness of this email however I just wanted to ensure you had all the details to assist me. I have left messages for Alex a couple times this week and haven’t heard back (no biggie as I am sure you guys are swamped). I am hoping this will be a more effective route to connect with someone.

    Please feel free to respond via email or call me at the number listed below. I will be available to talk anytime after 10:30am EST Wednesday, before 2:00pm EST Thursday, or after 1:00pm EST Friday.

    Julie Harper

  3. Vanessa Chase says

    Good morning! I hope you are having a good one. I came across your article in regards to your journey into the mortgage industry. I’ve contemplated entering it for some time. Mentally I’m ready but I’m full of questions and have attempted to reach out to our licensing department however since they work from home now my luck in getting a returned phone call just hasn’t happened or email replied to. I’m hoping you can help me. I live in Tennessee and I’m wondering does state law require for me to have my mortgage license if I only plan on being an intermediary but own a mortgage company? Thanks so much for your time.☺

    Vanessa Chase

  4. Henry Kimball says

    I applied for mortgage loan however they need a letter of explanation.
    My account went to collection it was a overdraft from bank if 392 usd. And i really dont know how to explain it

    I wasn’t concern that time that the bank was sent it to collection agency
    But I never receive letter from collection agency I only find out when I pull my credit report after i apply for a mortgage loan. Hope you can help.me how to explain to my mortgage lender.

    Thank you

  5. Gustan Cho, NMLS 873293 says

    You don’t need a NMLS license if you own your own mortgage company but do not intend to originate loans. You only need a NMLS License if you are going to be a producing manager or owner. Does this answer your question?

  6. Gustan Cho, NMLS 873293 says

    Thank you for reaching out to me and my team. Let me try to cover the main points line item per line item.

    We have no lender overlays so as long as we can get an approve/eligible per automated underwriting system you are set with us.

    1. Maximum debt to income ratio allowed is 50% DTI for AUS APPROVAL
    2. We can use IBR payments on conventional loans. NOT FHA so if you convert your student loans to an IBR payments, we can use that. Otherwise the fully amortized payment on an extended plan is fine too
    3. I don’t believe her 700 credit score client didn’t get an automated approval. Never heard of such thing.

    I think we have a great shot. You have higher credit scores and just those late payments. We can play around with the AUS and be creative to see if we can get you an automated system approval. I will have my Associate Alex Carlucci call you.

  7. Bill Messina says

    Shopping around for a 90% or 95% LTV Jumbo with no PMI, and low monthly payments. Home price is around $1.8M, though might be proceed lower upon offer negotiation. I’m aiming for $1.6M -$1.7M range. Excellent credit – 740s, no bankruptcies, etc. Doing some numbers with other lenders to see which works best for me. Location – Seattle WA

  8. Inga says

    Good Morning,

    my name is Sara & I am writing to you on behalf of myself & my partner, Marie. We are Canadian cash investors looking to close on a home soon in Detroit & were interested in the Investor Cash Flow program to qualify for a cash-out refinance. We would purchase under our corporation. Homes we are looking at are between 20-30k, already tenanted. We would love to discuss when you’re available.

    Thank you,

  9. Kelly D'Angelo says

    I’m looking to buy a single-family home in Seattle Washington. I have a 584 credit score and have charge offs and collections account from 2 years ago. Only one collection account of $43K. I read you don’t do lender overlays so this might help me qualify for more under the FHA program.

  10. Donald Coffiedl says

    I’m interested in buying my first home and I have accounts in collections. I read that this company works with people who have collections so I figured I would inquire.

  11. Ted Lieu says

    I have been out of work due to covid, I am now back to work and gainfully employed but the virus has effected my ability to get a loan due to the fact they aren’t looking at my weekly income, but the lack of income due to a Pandemic! I just want to be in my new home.

  12. Michelle Whelan says

    Currently in Chapter 13 bankruptcy, filed on 5/6/2019.
    Looking to purchase a home in Arkansas at $320K.

  13. Thomas Siegel says

    I sold my home in NJ. It was late on payments with COVID but then got a very good job and was able to do a loan mod and was in good standing for 3 months (Oct, Nov, Dec) and then sold my property and paid in full.

    I have $10,000 (possibly $15,000-20,000 if needed but would like a cushion) to put down.

    I make a little over $60,000/year.

    My credit score average between all 3 reports is 640 and does not yet show my loan paid in full (it closed Dec 29).

    Would I qualify for this amount? I have found the home I wish to buy and would like to put an offer in.

    If I would qualify… how long does it take to close on a home?

    And also —- The property is 6.5 acres with a 4 bed/2 bath home and has 2 mobile homes on it that were rented out previously. They are in excellent shape and the realtor says I could easily rent them out again for $750-1100/month. Would these help get me approved or would they hurt me? My plan was to live in one while I update the existing home to my preferences.

    Thank you very much!

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