How a property tax bill can affect your ability to qualify for a home purchase…

I am working with several buyers right now…all of them are pre-approved for their mortgage financing with their various lenders of choice. And of course, the loan officers they are working with qualify them for a loan amount and monthly payment based on the buyers‘ income, assets, and credit score.

There are four elements that make up the monthly mortgage payment – loan principle, loan interest, property taxes, and homeowners insurance. Many buyers do not realize that their loan officer’s estimate for annual property taxes is usually based on 1.25% of the purchase price, then divided by 12 months in the year to estimate what amount gets factored into the total estimated monthly payment. Well, let me tell you – depending on where the home you are purchasing is located, the annual property taxes may be much higher than that estimated number. AND depending on the buyer’s circumstances and debt-to-income ratio, a higher tax bill could mean you don’t qualify for enough to purchase that particular house after all.

What do you mean Erin?? Well, there are several VARIABLE elements that make up the property taxes for a home…not just the standard property tax based on the value of the house – but also things like school bonds, mello roos, local assessments, flood control, etc. These are called “Direct Levies” on a property tax bill.

Let me illustrate this with an example. I am working with a buyer client who wants to purchase a home in a neighborhood that has LOTS of these little variable elements. The house my client wants to purchase is $315,000. So when my client was pre-approved, the loan officer calculated his approval based on annual property taxes estimated at $3,937.50, or $328.13 per month ($315,000 x 1.25%, divided by 12 months) layered into the monthly mortgage payment. OK, that’s great. BUT, the reality of this particular property is that in addition to the standard property tax amount, there are several local assessments and Mello Roos. Here is how the tax bill for the house breaks down:

BASE PROPERTY TAX $3,150.00
COSUMNES CSD – DIST. WIDE L & L $318.48
ELK GROVE SCHOOL DIST MR – CFD #1 $200.00
WATER & DRAINAGE STUDIES – SCWA 13 $6.92
POPPY RIDGE CFD NO. 2003-01 $939.64
STREET MAINTENANCE DISTRICT NO. 1 $155.58
STREET LIGHTING MAINT DISTRICT #1 $17.88
POPPY RIDGE SERVICES DISTRICT $173.10

Total – $4,961.60 per year, or $413.47 per month. That is a substantially higher amount than the loan officer’s estimate of $328.13 per month used to qualify my buyer client for his loan…in fact, that extra amount of the property taxes decreases my client’s spending power by $16,000 in purchase price…so now that $315,000 house is out of reach for them.

SO – when out home shopping, make sure you or your agent looks into the property tax situation, specifically for those “Direct Levies” that increase the property tax bill! For Sacramento County, you can find this information online at http://www.eproptax.saccounty.net/.