Ding, ding, ding... It's tax time. Yikes! This quick Q&A goes over some of the common questions that we run across regarding property tax and deep dives into how it relates to mortgages. It may give you a better understanding of what to look for when thinking about your next big purchase. Take your time when reading through it! After all, knowledge is power...
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Q: What are property taxes and who has to pay them?
A: The owner of the property or the person who will be purchasing the property will pay the property taxes. However, if it is a purchase/sale transaction, where a buyer is buying a property, then the seller will be responsible for the payment of taxes pro-rated to the date of the sale. Then, the title company will calculate those taxes showing who owes what. The bottom line is, the property owner will pay the taxes on the property (one way or the other).
Q: Are property taxes included in my mortgage payment?
A: Property taxes can be included in your mortgage payment, at your option, if your loan-to-value (LTV) ratio is less than 80%.
So, if you’re putting down 20% or more on a purchase transaction then, typically, you would have to option not to escrow your property taxes.
However, if your down payment is less than 20% then you certainly would be required, on a house loan, to escrow the property taxes.
Q: How are the property taxes calculated?
A: The property tax rate is set by the county appraisal district (CAD) and the tax office in each county in the state that you reside in. The tax rates for each county vary and are based upon the county’s budget
A community hospital that is largely funded by tax dollars would be a good example of this. In this example, that tax rate would be calculated as a percentage of the total value of the property or based on what the appraisal district says the value of the property would be.
Q: Who do I pay the property taxes to?
A: Property taxes are ultimately paid to the local tax office. You’ll receive a property tax statement every year in October, and if you disagree with that you would have had the opportunity, prior to the issuance of the amount of tax due, to go before the local county tax arbitration board and argue your case to lower your taxes. However, in most cases, people are largely unsuccessful with lowering their tax basis.
Q: Are property taxes and real estate taxes the same thing?
A: No, property taxes are based on the assessments of the local tax district for entities like independent school districts, who are largely funded, in the state of Texas, with taxpayer money that is calculated based on the taxes that you pay on any real estate that you may own.
Real estate taxes in Texas would be the same thing, but in other states, like Oklahoma, you would have to pay a “stamp” tax on each property that is bought and sold.
So, property taxes are pretty much based on a percentage of the value assigned to the property by the local appraisal district. In Texas, these taxes are generally referred to as property taxes or real estate taxes.
Q: What other taxes are included in my mortgage payment?
A: No other taxes are really included in a mortgage payment. Only the property taxes are included.
Q: Are property taxes held in escrow?
A: Again, at your option, they can be. If you’re down payment is greater than 20%, or you have more than 20% equity in the property, then typically the lender would not require you to escrow for taxes. However, a lot of people prefer to hold their taxes in escrow because they don’t like receiving a tax bill at Christmas time that says you need to cough up 3% of your property value to the local tax district.
If you’re down payment is less than 20% on a purchase then you are required to escrow for taxes. Those taxes are collected by the mortgage company and then sent to the local tax authority once a year by the servicing company on your mortgage.
Q: Should I budget for property taxes when considering a mortgage? If so, how much?
A: Absolutely. How much depends on what the local tax rate is on the specific type of real estate in question. Generally speaking, for residential real estate in Texas you would probably pay a minimum of 2.5% of the property value (if not 3% in certain counties).
If you want to be on the conservative side then you should budget for a 3% tax rate. However, it is probably best to check with the local tax authority to find out what the assessment rate is based on the value of the property.
Q: Are property tax rates the same throughout the nation?
A: No. Property taxes vary state to state and county to county.
Q: Are different types of property taxed at different rates?
A: Yes, different types of properties are taxed at different rates and some properties are exempt from paying property tax. For example, disabled veterans are largely exempt when it comes to paying property taxes on a residential property that is purchased by a disabled veteran of the United States military. Otherwise, property taxes are mostly mandatory.
Q: Can I get a mortgage with unpaid property taxes?
A: No, you cannot. If the buyer is getting a mortgage then the lender will not make the loan unless the property taxes are made current. Property taxes have to be paid either by the buyer or, preferably, by the seller who may default on their taxes. In this case, there could be a foreclosure for lack of payment, which is a disastrous thing to happen and should be avoided at all costs by either the seller or the buyer.
Q: Will banks foreclose on my house if I miss a property tax payment?
A: A bank would not foreclose on your house if your miss the property tax payment if you are not escrowing. However, if you are escrowing, it is the bank’s responsibility to make sure that the property tax payments are made.
Again, if you’re not escrowing, and you don’t pay your taxes, the bank won’t foreclose on you, but the local tax district will. Independent school districts, especially in the State of Texas, will pursue a legal remedy for non-payment of taxes. Overall, that is not a good place to be.
Q: Can I prepay all of my property taxes to reduce my monthly mortgage payment?
A: You would certainly have the option to prepay your property taxes if you are escrowing. But then, what is the point of escrowing if you are prepaying your taxes? So, most people who escrow will pay their property taxes monthly with their normal principle and interest payments.
If you’re not escrowing, you can certainly pay part or all of your taxes at any point during the year. I’ve never known a tax assessor who did not appreciate you sending money in sooner than it was due.
Q: Do underwriters consider property tax when evaluating a borrower’s ability to repay?
A: Yes. The cost of property tax, house and mortgage insurance, and principal and interest payments are all factors when evaluating a borrower’s ability to repay the loan. Also, homeowner’s association (HOA) dues are a factor for people who are buying a home in a subdivision and have to pay HOA fees.
Q: Where should borrowers go to find out more information about property taxes?
A: They can go directly to the central appraisal district. You can actually google “CAD + your county” and enter the address and property information into the CAD system. The results will show you all of the current tax information that will pull up the property.
So, that would be a good first step before buying a property so that you know just how much your property taxes will be. In Texas, it is particularly important to understand the tax liability on your property because property tax rates are considerably higher than they are in most other states.
Q: Will buying a property with unpaid taxes affect my mortgage?
A: Either way, the taxes will have to be brought current by the seller or the buyer. However, the seller cannot transfer title unless the taxes are paid because the local tax authority has the right to foreclose for non-payment of taxes.
That being said, the bank may pay the unpaid taxes on the buyer’s or seller’s behalf. If the bank does this, they will contact whoever previously owed the taxes and demand repayment. In this situation, the bank has the option to foreclose on the property, but it wouldn’t be in their best interest to do so.
Q: Are property taxes deductible on your income?
A: As a disclaimer, I’m not a CPA, but yes… Property taxes may be deducted, along with interest payments on your mortgage, when you file your federal income tax return.
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First Source Capital Mortgage has 30+ continuous years of experience in the mortgage industry. If you have any further questions or concerns about how property taxes apply to your mortgage then please feel free to email us at Dan@fscap.com or give us a call at (903) 482-1123. We look forward to serving you in whatever way we can!
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NMLS# 217672
3911 98th St, Suite 102
Lubbock, TX 79423
(903) 482-1123
