A few days ago, I was reviewing a homeowner’s Closing Disclosure from their purchase that closed with another lender. This couple had come to me when they were purchasing the home, however the builder was offering extra incentives for buyers for working with the builder’s lender. I was surprised to see that property taxes were very under-estimated.
When someone is buying a home that has recently been built, it’s very likely that the home has not yet been valued by the county’s tax accessor. The only value that has been determined is for the lot. However, once you purchase the home, even though the home has not yet been assessed, you will owe taxes on both the land and the home. The “missing taxes” are called “omit taxes”.
From King County’s Tax Assessors site:
Omit taxes are for improvements to the property to which value should have been assessed in prior years but wasn’t (for example, a new house). Omitted assessments are applicable for up to three prior years. Taxes are based on the assessed value and levy rate appropriate for each prior year.
Each city has tax rates (levy) that are used for determining property taxes. When you vote to pass something that is attached to a person’s home value, this is how it’s paid for. Here’s a list of King County’s levy rates. It’s not too difficult to determine an estimate of how much the total property bill will be. You can take the sales price of the home and multiply it by the levy rate to determine an estimated tax bill.
Lenders use different calculations for property taxes when they have not yet been assessed. Some use 1.25% of the sales price and some may use the actual levy rate.
This is important for qualifying a home buyer to make sure they can afford the mortgage payment for when the full property taxes will be included in the payment and also because, as referenced above, the homeowner will owe the county the “omit taxes” from the day the close on the new home to the present. If the estimate is low, the homebuyer will have a shortage in their escrow reserve account to contend will and a larger mortgage payment. (Shortages in the escrow reserve account often happen with existing homes because of property taxes rising). If too much funds have been collected, the mortgage servicer may adjust the mortgage payment and/or send the homeowner a refund.
What was surprising to me with the client I was helping earlier is that the Closing Disclosure from their purchase showed that “some” property taxes were being collected.
They were only collecting for the land assessed portion which is about 1/3 of the total tax bill for this homebuyer who now has to prepare to send a check for the difference to the mortgage servicer when the shortage to the escrow reserve account is discovered and they have to adjust to a higher mortgage payment.
I’m also surprised the Closing Disclosure allows for “some” taxes to be disclosed. This was a first for me! And I hope that if you’re considering buying a new construction home, that you double check the amount of property taxes that are being collected so you can avoid a surprise to your finances.
PS: I am always happy to help you with your home buying or refinancing need! 😉
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