Property Taxes: Qualifying for a Higher Home Purchase Price

When buying a resale property, the calculation of property taxes is pretty standard. The lender requires you to use the amount from the local municipality’s most recent annual property statement. Nothing out of the order. However, if you’re buying a pre-construction property, that’s where there can be some wiggle room.

With a pre-construction home, the property hasn’t been fully assessed by closing date. Perhaps the land on its own has been assessed, but the completed property and land together are almost never assessed. So how does the lender come up with annual property taxes to use? Lenders do this in a couple of ways.

The first way is by taking the purchase price and multiplying it by a percentage. Lenders tend to use between 0.75% and 1%. This can make a big difference. If you’re buying an $800,000 property, 0.75% of the purchase price would be $6,000, while 1% of the purchase price would be $8,000. That’s a difference of $2,000! This can make a huge difference in the mortgage debt ratios. It could be the difference between qualifying and not qualifying if your ratios are tight. Ideally, you want to look for a lender who uses 0.75% if your debt ratios are tight.

The second way is by using something called the “mill rate.” Each municipality has one. You can use the mill rate to calculate the annual property taxes of your new home. The mill rates are usually published online. You multiply the mill rate by your property’s purchase price. Using the mill rate, your annual property taxes might only come out to be $4,000. That’s $4,000 less than they would have been using 1% of the property taxes. Now hopefully you can see why the property tax formula matters so much for new home!