For Mortgage Borrowers, a Property-Tax Trap-By Anya Martin

Lenders include property taxes when calculating a borrower’s ability to repay a home loan. As a result, in cities with high taxes, borrowers may have trouble qualifying.

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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.

New Jersey, Illinois and New Hampshire have the highest property tax rates in the country, according to a recent study by credit-monitoring website WalletHub.com. Property taxes on a home valued at $175,700, the national median, will set a New Jersey homeowner back $4,029 a year, according to the WalletHub 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 $417,000 in most areas and $625,500 in some high-priced places—property taxes can be a hefty addition to monthly payments, says John Walsh, CEO of Milford, Conn.-based 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 Chicago, Ill.-based 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.
Northeastern states typically have the highest tax rates and Southern states the lowest, but rates can vary widely locally by counties and municipalities within a state, says Jill Gonzalez, a WalletHub analyst.
For example, a $4.5 million home in Stamford, Conn., will set back a homeowner $74,695 a year in property taxes, while the same home in Greenwich, Conn., costs just $29,655, Mr. Walsh says. “That’s an additional $3,752 per month to own the same $4.5 million house in Stamford,” he says.
In competitive housing markets, sale prices are rising so rapidly that tax assessments may eventually rise as well. For example, in the Denver metro area, home values are 45.29% above peak prerecession prices, according to the latest Home Price Recovery Index by mortgage-rate tracking website HSH.com.
Since there is typically a lag between a sale and the updated assessment, home buyers for the most part don’t have to worry about it affecting their ability to qualify for a home loan. Lenders typically use the current assessed value and tax amount when a borrower is buying or refinancing a home, Mr. Ciardelli says.
Olivier Koning for The Wall Street Journal A house in Paia, Hawaii, a state where property taxes are low but home prices are high.
However, there are a few exceptions. In Florida, for example, the lender will estimate and base loan approval on anticipated tax rates in the future, says Mark Shulman, chief credit officer for SunTrust Mortgage. In Florida, when a primary residence qualifies for the homestead exemption, annual increases in property taxes are limited to a small percentage rather than following home sales trends, he adds. Therefore, lenders know that the property-tax assessment can jump significantly after a purchase.
Here are a few more property-related tax considerations for high-end home buyers.
• Other property-related taxes. Some states, such as New York and Florida, levy additional real-estate-related taxes on home buyers that must be paid at closing. For example, New York mortgage tax rates vary from 0.75% in some rural counties to 2.175% for all mortgages of $500,000 or more in New York City, but 0.25% is typically paid by the lender. New York City also has a one-time 1% “mansion tax” on properties over $1 million. Some municipalities also levy one-time taxes on the transaction, Mr. Walsh says.

• Taxes are just one homeowner expense. Don’t let low property taxes tantalize you or high property taxes necessarily scare you away from buying where you want to live, says Ms. Gonzalez, of WalletHub. Hawaii has one of the lowest property-tax rates in the country, according to the company’s analysis. But with a median home value of $504,500, it has some of the highest real-estate prices in the U.S., she adds. Conversely, Chicago may have the second-highest property-tax rates, but otherwise is pretty affordable compared with other major U.S. cities, Mr. Ciardelli says.

• When to consider an appeal. If an assessment seems high, a homeowner has little to lose in trying to appeal the amount, Mr. Ciardelli says. Lowering the amount one pays in property taxes may help one qualify for a future refinance, he adds.
Culled from The Wall Street Journal