Love Your New Construction ...
But Educate Yourself About Future Tax Bills
* I want to preface this article by saying it's geography specific to the Chicagoland Area and its collar counties ...
So you've opted for building or buying a newly constructed home ...
You've decided you'll invest most, or all, of your savings to cover Down Payment and Closing Costs. After all, it's a new home, you hopefully won't need money for repairs or improvements for quite a while, right?
Plus: The property taxes for your newly constructed home will initially be lower, as they'll be based upon the vacant lot on which your new home is built. (The new home wasn't completed yet for the previous tax year's bill.)
But how does this affect your future tax bill and the tax portion of your monthly mortgage escrow payment?
When obtaining financing: During your first year of a new construction occupancy, the real estate tax portion of your escrow account is based upon the last available tax bill for that property.
Again, that tax bill, (referred to above), is based on the vacant lot, so your Mortgage Escrow Account, set-up at the time of your Closing, has been funded by low monthly escrow payments ... maybe as low as $50 to $100.
It's important to point out: As your Mortgage Originator, I am required to base your tax escrow figures upon the MOST RECENT AVAILABLE tax bill. I, like all Lenders, am prohibited from collecting anything beyond that.
The pros for homeowners as a result of this are: Initial monthly mortgage payments are quite low. But unfortunately, there are cons that come with this too.
What are those negatives? In the second (2nd) year of occupancy, the County Tax Assessor having jurisdiction over the property will note that the property (vacant lot) has been improved upon with a newly-constructed residence.
In Chicago and its Collar Counties, the following is an example of what the typical ramifications of this vacant lot/new construction tax escrow scenario are ... and the time frame in which they occur:
As an Example:
1. Closing occurred in: August 2015. The Occupancy Permit is issued on that date.
2. Taxes for the previous year of 2014 (based on Vacant Land), payable in 2015, were $100.00.
3. The Builder paid the 2014 tax bill for $100 at the time of the Closing in August, 2015.
4. The Buyer/Borrower's Mortgage Escrow (based on the 2014 tax bill) is figured and set-up at Closing. The Mortgage Lender/Originator requires they pay $50 per month into their escrow for Real Estate taxes, beginning with their first payment due in October, 201.
5. New tax bills were issued in May 2016, for the previous 2015 tax year. They still don't reflect the newly-constructed improved property, as the Assessor's Records aren't updated in time to reflect that improved property's existence.
6. AFTER these tax bills were issued, the Tax Assessor updates the property record card noting the Occupancy Permit issuance and the date of Occupancy, August 2015. The Tax Assessor then submitted the new improved evaluation and assessment accordingly.
Fast forward to May 2016 ...
7. New tax bills are once again issued, but now they reflect 16 months of improved property (the last 4 months of 2014 and the entire 12 months of 2015). This new tax bill was issued at the current tax rate levied for the property's Township.
8. As a result, the Homeowner's/Borrower's Escrow Account was short. It didn't have enough money in it to pay the new tax bill reflecting the improved (newly constructed) property. *
Remember: The Escrow only had collected the low $50 per month amount allowed at the time of Closing. But the new bill was "catching up" on the missed months of taxes based upon the improved property.
9. The Mortgage Lender/Originator, based upon the new tax bill they have received, sends the Homeowner/Borrower a notice of an increase to their escrow payment ... or they provide the Homeowner an option to cover their shortage in escrow with a lump sum payment.
The result of this new construction tax scenario can be scary and burdensome for a homeowner. If they haven't prepared by setting aside an estimated amount for their new higher taxes, panic can set in.
All too often, I've seen the homeowner have to opt for the larger monthly escrow payments because they have not prepared for this event.
If you're considering the buying or building of new construction in Chicago or a Collar County: Don't be caught off-guard regarding your new construction property taxes. They will rise at some point. Be fully prepared for that.
While you're in your initial Mortgage Process and your Closing, listen to your Mortgage Originator. Heed my advice regarding your escrow and future tax bills.
This issue is too important to not fully understand it, prepare for it, and act upon it ...
* For thorough, detailed financing advice and assistance in the Chicago area, contact me today! I'll put my 40+ years of mortgage experience and expertise hard to work on your behalf.
I'm easily found at:
Mortgage Originator - NMLS #216987 - IL Lic. 031.0006220 - WI Licensed
American Portfolio Mortgage Corp.
Gene Mundt, Mortgage Originator, an Originator with 40+ years
of mortgage experience, will offer you exemplary mortgage service
and advice when seeking:
Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago and the greater Chicagoland region, including:
The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena, Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook, Romeoville, Naperville, etc.), DuPage County, the City of Chicago, Cook County, and elsewhere within IL & WI.
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