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Property Tax Proration
I am a new loan officer and I want to know what states are the states that property taxes are paid in arrears and there is property tax prorations. Can you use property tax prorations for the down payment since the sellers owe you the property taxes that were not paid with property tax prorations?
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1 Reply
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Property tax prorations happen during the sale of a property to ensure both parties pay only for the time they own it. Normally at closing, sellers will give buyers credit for property taxes accrued but not yet due.
Using Property Tax Prorations for Down Payment
FHA Loans: There are specific rules from the Federal Housing Administration (FHA) about what can count towards your down payment; seller credits — including property tax prorations — generally cannot be used to meet their minimum requirement of 3.5%. Your down payment must come from your funds or approved sources such as gifts from family members.
Conventional Loans: Depending on the lender, conventional loan guidelines may be more flexible than FHA when it comes to using prorated taxes for closing costs vs. prepaids and/or down payment.
Practical Example
Scenario:
Home Purchase Price: $300,000
Annual Property Taxes: $6,000
Closing Date: June 30th
Property Taxes Due in Arrears: Seller owes taxes from January 1st through June 30th
Proration Calculation:
Daily Property Tax Rate : $6,000 / 365 days = $16.44 per day
Seller’s Portion: 180 days (January 1st through June 30th) x $16.44 = $2,959.20
At Closing:
Seller Credits Buyer : $2,959.20 for buyer’s portion of year’s property taxes.
Buyer’s Responsibility : From July 1st forward buyer is responsible for paying property taxes.
Note : The amount credited ($2,959.20) by the seller usually goes towards reducing buyer’s closing costs not down payment.Property tax proration is standard practice in many states’ real estate transactions especially where arrears are paid; while these can help reduce closing costs for buyers they typically cannot be used to meet down payment requirements especially with FHA loans. Loan officers need to know these differences well enough so they can guide clients through home buying process effectively in different situations.