This blog will discuss how mortgage underwriters calculate property taxes on new construction homes. Property taxes on new construction homes can often affect the homebuyer’s debt-to-income ratio. The exact property taxes on new construction homes are not known until a few years after the development has been completed.
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 must determine a number when qualifying and underwriting the borrower.
In certain ways, mortgage underwriters determine property taxes on new construction homes when processing and underwriting a borrower. The following paragraphs discuss how mortgage underwriters calculate property tax on new construction homes.
Buying Existing Versus New Construction Homes
Property tax calculation is easy on pre-existing homes. However, estimated property taxes must be used on new construction homes. Underwriters want to ensure they do not underestimate property.
If you are buying a new construction home, you are walking in to an unknown chartered territory when it comes to property taxes. Property taxes on new construction homes is estimated and you will not know for sure until time pass.
y taxes on new construction homes. The mortgage underwriter’s main focus is the ability to repay the new housing payment. High property taxes on new construction homes will impact the borrower’s repayment ability if the borrower has higher debt-to-income ratios.
How Property Tax Numbers Assessed on New Construction Homes
Purchasing new construction homes is much different than buying pre-owned homes when it comes to property taxes. 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.
Property taxes fluctuates and is not fixed rate throughout the term of the loan. If property tax increases, the homeowner will see their monthly housing payment increase.
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? This blog will cover how mortgage underwriters calculate property taxes on new construction homes.
How Do Underwriters Calculate Property Taxes on 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.
Factors To Consider When Buying New Construction Homes
Most home buyers have a specific budget for their monthly housing payments. The principal and interest rates are fixed, and the property taxes on pre-owned homes are fixed unless the township or county increases them on pre-owned homes. However, the potential uncertainty on property taxes on new construction homes often adds stress to the home-buying process.
Property taxes on new construction homes can change in the future. 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 for how much homeowners pay.
Every local government entity, city/town, and county assesses taxes differently. How underwriters calculate property taxes on new construction homes is through the millage for the area the home is located. The millage rate is the real estate tax due per $1,000 in assessed value and is presented as a percentage.
How To Calculate Property Taxes on New Home Purchase
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 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.
The Role of The County Assessor in Assessing Property Values vs. Taxes
The assessor of the local government municipality is the officer that determines assessments. The assessors’ office determines the real estate assessment using several factors.
Assessors will determine a home’s value after using comparable properties in the area. The assessor’s assessed value is what determines property taxes on individual homes.
The starting point on how county real estate assessors assess homes is by examining like and similar properties to the subject home. This can be a no-brainer in a subdivision with many similar model homes. However, free-standing homes not in a subdivision can be more tricky, especially custom homes.
Are Property Taxes Based on the Purchased Price of the Home?
These homes are different than other homes in the area. There are no two of the same properties.
Most homeowners do not have any idea how their property is given an assessed value. A real estate property’s assessed value determines how much the property taxes are assessed. It is also the determinant of whether or not homeowners deserve an increase or decrease in their real estate taxes.
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.
Assessed Value Versus Taxed Value of Homes
Let’s 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, a pond with a waterfall, top-of-the-line appliances, top-of-the-line kitchens/baths, and a finished walkout basement.
So is the second home assessed at a higher value than the first comparable home under the assessor’s eyes? The assessor does not care about the bells and whistles of the home. Home Assessment is based on the square footage, bedrooms, bathrooms, and lot size.
How Do County Assessors Determine Property Taxes on Rental Properties?
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 to keep their existing 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.
Some homeowners rather rent out they’re exiting home and keep it as an investment home than sell it. County Assessors can use the income assessment method on investment rental properties. The way how the income assessment method works is it takes into consideration 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.
How Are Property Taxes Assessed on New Construction Homes?
Home Buyers who purchase a pre-owned home, 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 that exempt property taxes from disabled veterans.
Homeowners who think they are paying higher property taxes than their neighbors can always contest their property taxes. Many attorneys specialize in property tax appeals. No money upfront is needed. Attorneys will charge a percentage of the savings.
How Much Are Property Taxes on a Home Purchase
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.
Figuring out the down payment on a home purchase is simple because it is a percentage of the home’s purchase price. However, property taxes on each home is different. There is not a fixed percentage you can use for property taxes. Property taxes is different depending on the city, county, and state.
All government loan programs (FHA, VA, USDA) require property tax and insurance escrows. Conforming Loans allow homeowners to pay their real estate taxes independently if they have more than 20% equity where no escrow is required.
How To Get a Mortgage on a New Construction Home?
The team at Gustan Cho Associates are experts in qualifying, approving, and closing mortgages on new construction homes. Many homebuyers ask us at Gustan Cho Associates if getting a loan to build a house is hard.
Gustan Cho Associates has one time construction mortgage loan. It cover land acquisition, construction, and once the construction is done, the one time construction loan with turn into a permanent 30-year fixed-rate mortgage loan.
Not only do we have a no-lender overlay business model on government and conventional loans, but we have hundreds and non-QM and alternative mortgage loan programs.
Get Qualified and Approved For a New Construction Home Today
Home Buyers of new construction homes who need to qualify for a mortgage with a mortgage company with no overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Over 80% of our borrowers are folks other lenders turned down due to their mortgage overlays.
The team at Gustan Cho Associates are experts in helping borrowers with prior bad credit and credit scores down to 500 FICO. We are mortgage brokers licensed in 48 states, including Washington, DC, Puerto Rico, and the U.S. Virgin Islands.
The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays. Gustan Cho Associates is licensed in 48 states and have a wholesale lending network of over 210 wholesale investors. We have lending partnerships with wholesale lenders of government and conventional loans with no overlays, non-QM loans, and alternative financing programs.
March 18, 2023 - 7 min read