This guide covers property taxes in mortgage qualification and how it affects debt-to-income ratios. For homebuyers, especially first-time home buyers, property taxes in mortgage qualification are one of the most important aspects to consider when buying a home. John Strange, a senior loan officer at Gustan Cho Associates, explains how property taxes in mortgage qualification affects debt-to-income ratios:

Property taxes in mortgage qualification affects buying power. A $400,000 home can have $4,000 or $18,000 in property taxes. Every city, county or township has different property taxes.

Property taxes vary from state to state, county to county, and sometimes city to city. For example, my property taxes where I live is $12,000 per year. However, in the town next to me, less than a mile away, property taxes for a similar-sized property on a similar-sized lot is only $2,000—high property taxes often lower property values. For example, many homes in Illinois depreciate due to high property taxes. In this article, we will discuss how property taxes affect qualifying for a mortgage.

Difference In Property Taxes In Mortgage Qualification Depends on the County

Why such a huge difference? The town bordering my town has a landfill in that town. Due to the landfill, property owners pay substantially less in property taxes than the surrounding towns. Property Taxes are different depending on what county the home buyer is buying their home. States with lower property taxes often have stronger home values.

Shopping For Home

When shopping for a home, property taxes need to be considered. This is because taxes affect buying power. Mortgage underwriters will take property taxes into consideration when calculating borrowers’ debt-to-income ratios. There are situations where property taxes in a particular geographic region can be ridiculously high.

This can affect the home buyer’s buying power. Property taxes will affect debt-to-income ratio calculations. Mortgage underwriters calculate property taxes. Housing ratios could affect mortgage borrowers’ bottom-line buying power of a particular home. When a loan officer qualifies mortgage borrowers,  the loan originator will ask what the current property taxes are on the subject property to calculate property taxes in mortgage qualification. Click here for shop for a home

What are the Requirements for Property Tax?

Property tax requirements vary significantly depending on the jurisdiction (country, state, or local municipality). However, some common requirements include:

1. Property Assessment: The property must be assessed to determine its value. Local government assessors typically conduct this assessment and may involve factors such as the property’s size, location, age, condition, and any improvements made.
2. Tax Rate: Each jurisdiction sets its property tax rate, usually expressed as a percentage of the property’s assessed value. The amount can differ depending on various factors, such as the jurisdiction’s tax policies and budgetary requirements.
3. Payment Schedule: Property taxes are typically due annually, although some jurisdictions may offer options for semi-annual or quarterly payments. Local regulations usually determine payment due dates and any applicable penalties for late payment.
4. Tax Exemptions and Deductions: Some jurisdictions offer exemptions or deductions for certain properties or property owners. For example, properties used for certain purposes, such as agriculture or charitable activities, may qualify for exemptions. Additionally, deductions may be available for senior citizens, veterans, or individuals with disabilities.
5. Assessment Appeals Process: Property owners usually have the right to appeal their property tax assessments if they believe they are incorrect or unfair. This process typically involves filing an appeal with the local tax assessor’s office and providing evidence to support the claim.
6. Tax Collection: Property taxes are collected by the local government, which may use various methods such as mail-in payments, online payments, or in-person payments at government offices or designated locations.
7. Liens and Penalties: Not paying property taxes on schedule may lead to the imposition of fines and interest rates, potentially resulting in a tax lien on the property. In extreme cases, unpaid property taxes can lead to foreclosure proceedings initiated by the government.
8. Use of Tax Revenue: Property tax revenue is typically used to fund local government services and infrastructure projects, including schools, roads, public safety, and parks.

It is important to consult with the relevant authorities or research applicable tax laws so that your property adheres to local regulations.

What Properties are Subject to Real Property Tax?

Real property tax, also known as property tax, typically applies to a wide range of properties, including:

1. Residential Properties: This includes single-family homes, condominiums, townhouses, and residential rental properties.
2. Commercial Properties: This category covers retail stores, office buildings, shopping malls, hotels, warehouses, and other properties used for commercial purposes.
3. Industrial Properties: Factories, manufacturing plants, distribution centers, and other industrial facilities are subject to property tax.
4. Vacant Land: Land that is not developed or improved, such as empty lots or parcels, may also be subject to property tax.
5. Mixed-Use Properties: Properties that combine residential, commercial, and industrial uses are subject to property tax based on their respective classifications and assessed values.
6. Special Purpose Properties: Certain properties with specific uses, such as hospitals, schools, churches, and government buildings, may be subject to property tax exemptions or special assessment rules depending on local regulations.
7. Rental Properties: Properties used as rental units, whether residential or commercial, are generally subject to property tax.
8. Vacation Homes and Second Homes: Properties owned for personal use, such as vacation homes or second residences, are typically subject to property tax like primary residences.
9. Farmland and Agricultural Properties: Agricultural land, including farms, ranches, and orchards, may be subject to property tax, although there are often special assessment programs or exemptions available for agricultural use in some jurisdictions.

Property owners should verify their property tax obligations by consulting the local tax authorities or seeking professional advice. Property tax obligations differ based on local laws and regulations, assessment methods, tax rates, and exemptions.

Assessments on Property Taxes in Mortgage Qualification

There are cases where a $100,000 home has property taxes assessed at $7,000.00 per year. In other cases, a $400,000 subject property only has property taxes of only $1,500. Property taxes are not fair and do not make sense sometimes. Property taxes in mortgage qualification is extremely important, especially for borrowers with higher debt-to-income ratios.

Many folks make the mistake of purchasing a home with high property taxes and regret it after they move in. Homebuyers’ realtors will help home buyers shop for homes with lower property tax areas when shopping for a home if property taxes may pose an issue in buying a home.

Why is it Advisable for Prospective House Buyers to Investigate Property Taxes?

Prospective house buyers should investigate property taxes for several crucial reasons. Firstly, understanding property tax rates and assessments helps buyers plan their finances effectively, allowing them to anticipate ongoing expenses associated with homeownership.

Buyers can evaluate property affordability more accurately by assessing property taxes, ensuring they stay within their budget. Moreover, investigating property taxes enables buyers to consider potential tax deductions associated with homeownership, maximizing their tax savings.

Since property tax rates and assessment practices can vary significantly between locations, researching property taxes allows buyers to compare different neighborhoods and assess the overall value proposition of properties.

Examining past tax trends helps buyers anticipate potential tax increases and prepare accordingly. Lastly, investigating property taxes can uncover potential exemptions or incentives for certain properties or homeowners, providing additional financial benefits. Overall, thorough research into property taxes empowers prospective buyers to make informed decisions, budget effectively, and avoid unpleasant financial surprises post-purchase. Speak With Our Loan Officer for Mortgage Loans

Claiming Homestead Exception

In general, non-owner-occupied properties have higher property taxes than owner-occupied properties. For homebuyers purchasing a property from a non-owner-occupied owner, the current non-owner-occupied property taxes will be used to qualify property taxes in mortgage qualification.

Unfortunately, the taxes after a homestead exception will not apply for mortgage qualification purposes when a mortgage underwriter is underwriting the loan. This can be an issue with borrowers with high debt-to-income ratios. The mortgage loan underwriter will use the current investor-owned home’s property taxes for income qualification.

Appeal Property Taxes If  Property Taxes Are Higher Than Neighbors

Homebuyers paying higher property taxes than their neighbors can appeal property taxes with the County Assessor’s Office. Be prepared to provide proof of similar and like properties within a 1 square mile area.

Homebuyers can also hire a private appraiser to appraise their property and contest the value of their property taxes with the county. Some attorneys and consultants will contest property taxes and charge a percentage of their first-year savings.

If you have any questions about How Property Taxes in Mortgage Qualification Affects DTI or you need to qualify for loans with a lender with no overlays on government or conforming loans, please contact us at Gustan Cho Associates at 800-900-8569. Text us for a faster response. Or email us at alex@gustancho.com . The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. Talk to us about your Mortgage Loans

FAQ: How Property Taxes in Mortgage Qualification Affects DTI

1. Why are property taxes in mortgage qualification crucial for homebuyers? Property taxes significantly impact buying power and monthly expenses, influencing affordability and budgeting for homeownership.

2. How do property taxes vary from one location to another? Property taxes vary based on jurisdiction, affected by local government policies, budget needs, and infrastructure.

3. How do property taxes affect debt-to-income ratios in mortgage qualification? High property taxes increase monthly housing expenses, reducing a buyer’s purchasing power and potentially affecting debt-to-income ratios.

4. How can buyers mitigate the impact of high property taxes? Buyers should consider property taxes when house hunting and seeking properties in areas with lower tax rates. They can also appeal tax assessments if they believe they’re unfairly high.

5. What steps should buyers take to investigate property taxes? Research property tax rates, payment schedules, exemptions, and appeals processes in desired areas. Consulting local tax authorities or professionals can provide valuable insights for informed decision-making.

This blog about How Property Taxes in Mortgage Qualification Affects DTI was updated on March 29th, 2024.