7. Property Taxes, Insurance, and Impounds.pdf

6. Property Taxes, Insurance, HOA Fees, and Impounds By Amber Hatter Summary Understanding property taxes, homeowner's insurance, HOA fees, and impounds is vital for lenders to ensure accurate loan qualification, protect property value, and comply with regulations. For real estate agents, this knowl...

6. Property Taxes, Insurance, HOA Fees, and Impounds By Amber Hatter Summary Understanding property taxes, homeowner's insurance, HOA fees, and impounds is vital for lenders to ensure accurate loan qualification, protect property value, and comply with regulations. For real estate agents, this knowledge aids in providing accurate expense estimates, offering informed advice, and ensuring smoother transactions. This expertise benefits both parties by facilitating more informed decisions, protecting investments, and enhancing client service. Agenda I. II. III. IV. V. VI. Property Taxes Supplemental Property Tax Tax Pro-rations Standard Homeowner’s Insurance Policies Homeowner’s Association (HOA) Fees Impounds I. Property Taxes > Owner Vs. New Borrower Proposition 13 1 2 3 4 Proposition 13 is a famous California law that affects property taxes. It was passed by voters in 1978 and is considered an amendment to the state's constitution. Here's a breakdown of its key features: Limits property taxes: Prop 13 limits property taxes to 1% of a property's assessed value, with some exceptions for voter-approved levies. Sets base year value: It establishes a base year value for property taxes, which is typically the value when acquired. Restricts assessment growth: The assessed value of a property can only increase by a maximum of 2% per year, or the rate of inflation (whichever is lower). There are exceptions for changes in ownership or new construction. Alameda County, CA https://www.acgov.org/propertytax/ Property Taxes, Secured, example: Internet Copy of Bill Property Tax Installments Real Estate Property Taxes – Fiscal Year First Installment 7/1 2023 7/1 Beg. of Fiscal Year Second Installment 12/31 Fiscal Tax Year N 11/1 Due Inst. D 12/10 Del. 1st 1/1 6/30 2024 F 2/1 Due Inst. A 4/10 6/30 Del. End of 2nd Fiscal Year How are property taxes paid? 20% Down Payment or More: Option to pay property tax on an installment basis. Option to use an impound account for taxes and insurance. 1st and 2nd Loan: Same options as above: installment basis or impound account for taxes and insurance. Less Than 20% Down Payment: Required to have an impound account for taxes and insurance. Monthly mortgage payment includes 1/12th of the yearly property tax bill. Exception Rule: Some lenders do not service impound accounts, regardless of Loan-to-Value (LTV) or Combined Loanto-Value (CLTV). Always verify with the lender. How are property taxes paid? (Cont.) All-Cash Purchase: Must pay property tax on an installment basis. Option to pay one installment as due or the entire amount at once. Home Purchase: After closing escrow, borrowers will receive a supplemental property tax bill. Refinance: Obtain a copy of the yearly property tax bill or current mortgage statement. May have the option to re-elect how to pay property tax. How are Property Taxes Calculated? Your property taxes will be approximately 1% of your purchase price, plus any voterapproved bonded indebtedness of the community Hence, the 1.25% rule of thumb. Counties may vary. Property Tax Calculations Fiscal Year Property Tax Formula = 1.25% x Purchase Price 1st Installment = 1.25% x Purchase Price ÷ 2 2nd Installment = 1.25% x Purchase Price ÷ 2 Monthly property Tax = Yearly ÷ 12 months Ex. #1 Buyer Bill is purchasing a home for $100,000. He is making a 20% down payment ($20,000) with a new loan of $80,000. He elects to pay property taxes on an installment basis. He will receive a bill from the county tax assessor for both installments. He can pay either one installment at a time or the total amount owed for the fiscal year. What will be Bill’s 1st installment property tax payment? 1st Inst. Property Tax = 1.25% x $100,000 ÷ 2 = $625 Ex. #2 Buyer Betty is purchasing a home for $100,000. She is making a 20% down payment ($20,000) with a new loan of $80,000. She elects to have an impound account (for taxes and insurance). In other words, she will pay 1/12th of her yearly property tax bill in her monthly mortgage payment. What will be Betty’s monthly property tax payment? Yearly Property Tax = 1.25% x $100,000 = $1,250. Monthly Property Tax = $1,250 ÷ 12 mo. = $104.17 Ex. #3 Buyer Jill is purchasing a condominium for $75,000. She is paying all cash! She will have to pay her property tax bill on an installment basis. What will be Jill’s yearly tax bill? Yearly Property Tax = 1.25% x $75,000 = $937.50 What will be Jill’s 2nd Installment of Property Tax? 2nd Installment Property Tax = 1.25% x $75,000 ÷ 2 = $468.75 II. Supplemental Property Tax >Allocation Oh No, Supplemental Property Taxes?! What is supplemental property tax? Supplemental property taxes are additional secured taxes that are due when the property changes ownership or new construction. The additional tax is owed because the County Assessor is required to immediately adjust the January 1 value to reflect the new value of the property (see Secured Tax definition). A Fiscal Year runs from July 1 to June 30. Two supplemental bills (or refunds) will be issued when an event occurs from January through May. One supplemental bill (or refund) will be issued when the event occurs from June through December. Ex. #1 Supplemental event occurs in March 2008; additional tax effective April 1, 2008: 1. Supplemental event occurs in March 2008; additional tax effective April 1, 2008: You purchased a home at market value in March of 2008 for $300,000. The previous owner's assessed value was $261,000. Increased value: $39,000 ($300,000 current market value − $261,000 prior assessed value) Annual tax increase: $400 ($39,000 × 1.025% tax rate, including bond debt*) * The tax rate of 1.025% is for illustrating purposes only. Please contact your county auditor-controller for local tax rate information. Two supplemental bills: Supplemental tax bill #1: $100 ($400 ×.25 proration factor*) * For the remaining months of April, May, and June of the fiscal year July 1, 2007, to June 30, 2008 Supplemental tax bill #2: $400 (For the increased taxes for the entire ensuing fiscal year, July 1, 2008 to June 30, 2009) California Board of Equalization Ex.#2 Supplemental event occurs in October 2007; additional tax effective November 1, 2007: 2. Supplemental event occurs in October 2007; additional tax effective November 1, 2007: Your contractor completed the construction of an additional bedroom and bathroom in your home in October of 2007. The assessor valued the new construction at $39,000. Increased value $39,000 (value of new construction to be added to existing roll value) Annual tax increase $400 ($39,000 × 1.025% tax rate, including bond debt*) * The tax rate of 1.025% is for illustrative purposes only. Please contact your county auditor-controller for local tax rate information. One supplemental bill: Supplemental tax bill #1 $268 ($400 ×.67 proration factor*) * For the remaining eight months (November, December, January, February, March, April, May, and June) of fiscal year July 1, 2007 to June 30, 2008 California Board of Equalization III. Property Tax Pro-rations >Between buyer and seller How are property taxes prorated? Property taxes, covering July 1 to June 30, are split between the seller and buyer at sale. The seller pays up to February 22, and the buyer from February 23 to June 30. This ensures fair tax payment based on the ownership period. This assumes that the seller did pre-pay more than normal. Proration Essentials: ✓Need annual tax amount and closing date. ✓Calculate daily tax rate (annual tax / 365 or 366). ✓Determine days owned by each party, then apply daily rate for prorated taxes. ✓Adjust and settle prorated taxes at closing. ✓This method fairly divides taxes at property closings. Ex. 1# Straightforward Proration Annual Property Taxes: $5,000 Closing Date: July 15, marking the year's midpoint. Proration Calculation: Daily Tax Rate: $13.69, derived from dividing the $5,000 annual tax by 365 days. Ownership Periods: The seller owns the property for 184 days (Jan 1 - Jul 14), and the buyer for 181 days (Jul 15 - Dec 31). Prorated Tax Responsibilities: The seller's credit is $2,527.36, and the buyer's debit is $2,471.64, calculated by multiplying the daily rate by their respective days of ownership. At Closing: The seller is credited for the buyer's share of the year's property taxes, and the buyer covers their portion for the remainder of the year. Ex. #2 Proration with an Offset Annual Property Taxes: $7,200 Closing Date: March 1, early in the year. Proration Calculation: Daily Tax Rate: $19.73, from $7,200 annual tax divided by 365 days. Ownership Periods: The seller's ownership spans 59 days (Jan 1 - Mar 1), and the buyer's extends over 306 days (Mar 2 - Dec 31). Prorated Tax Responsibilities: The seller's credit amounts to $1,165.07, and the buyer's debit to $6,038.98, based on their ownership durations. Additional Context: Assuming the seller has prepaid the full annual tax. Offset Mechanism: The buyer's upfront payment is reduced by an offset, considering the seller's prepaid taxes. Adjusted Closing Costs: The buyer's final debit is adjusted to $4,893.64 after applying the offset, reflecting their share of the property taxes minus the seller's prepaid contribution. IV. Standard Homeowner’s Insurance > Home Insurance What is a standard homeowner’s insurance policy? A standard homeowner's insurance policy covers your home, belongings, and liability for injuries on your property, including costs for temporary housing if needed. Remember: Coverage must be at least 80% of your home's replacement value (80/20 rule). Not all events (like earthquakes, and floods) are covered. Review coverage limits and deductibles. Consult your agent for personalized advice. How do you calculate homeowner’s insurance? Any car insurance provider can also give you a homeowner's insurance quote tailored to your situation. Lenders typically estimate homeowner's insurance for loan pre-qualification using a standard formula: Annual Policy Cost: Loan Amount * 0.35% = $X Monthly Policy Cost: (Loan Amount * 0.35%) / 12 = $X insurance policy, annual, or is it monthly? Is the standard Annual Policy Annual Policy = Loan Amount x.35% = $X. Annual Policy = $800,000 x.35% = $2,800. Monthly Payment Monthly Policy = Loan Amount x.35% ÷ 12 months = $X. Monthly Policy = ($800,000 x.35%) ÷ 12 months = $233.33. Homeowner's insurance is included in impounded mortgage payments. For condos with HOA fees, fire insurance is covered by monthly assessments. Alternatively, annual payment of homeowner’s insurance is possible, based on the agreement with your insurer. V. HOA Fees >Homeowner’s Association What are HOA fees? HOA fees are monthly charges by homeowner's associations for community and amenity maintenance. They fund common area upkeep, including landscaping, trash service, and facility repairs. Fees range from $100 to $1,000, averaging $200-$300, and vary by location, property size, and community amenities. VI. Impounds > For Property Taxes & Insurance What are Impounds? In the real estate and lending world, impounds or escrow accounts are set up by your mortgage lender for easier management of property taxes and homeowner's insurance. This method ensures these critical payments are made on time, preventing issues from missed payments and aiding in budgeting by spreading out large annual costs into monthly installments. The lender oversees these accounts, adjusting your payments as needed to cover upcoming expenses. How are tax impounds handled? An impound schedule for property taxes outlines how much and when homeowners contribute to an escrow account for their taxes, dividing the annual amount into monthly payments. The lender uses these funds to pay the taxes due, ensuring timely payment and spreading the cost over the year for the homeowner's convenience. Q&A’s? Any questions?! The End