A Property-Tax Trap

Some home buyers should brace themselves for sticker shock: not from the price of the house, but from the property-taxes they’ll pay when the deal closes.

Property taxes on a home valued at $420,200, the cities median home value, will set a California homeowner back $3,301 a year, according to Smart Asset analysis, based on Census Bureau data on rates and median home values.

When lenders calculate the monthly mortgage payment to determine a borrower’s ability to pay, they include not just principal and interest, but also property taxes and homeowners’ insurance prorated across 12 months. For jumbo mortgages—those above government-backed loan limits of $420,200 in most areas and $1.15 Million in some high-priced places—property taxes can be a hefty addition to monthly payments, says John Walsh, CEO of Milford, Total Mortgage Services.

“The amount of taxes can have a huge impact on your buying power and your ability to qualify,” Mr. Walsh says. “People are very worried about interest rates but forget about taxes.”

Borrowers who are self-employed or who can’t document a regular stream of income (even if they have substantial assets) may be particularly vulnerable, says Victor Ciardelli, CEO of Guaranteed Rate. If property taxes put a borrower’s debt-to-income ratio above lender-acceptable levels, usually 43% for jumbo mortgages, a borrower may still qualify but have to make a higher down payment, he adds.

Rates can vary widely locally by counties and municipalities within a state, says Jill Gonzalez, a WalletHub analyst.

Source: Wall Street Journal