FHA Loans and Your Property Taxes

Property taxes are an important part of your monthly mortgage payment. FHA rules require lenders to use an escrow account for property taxes and homeowner's insurance. 

Your total payment, known as PITI, includes Principal, Interest, Taxes, and Insurance. The lender calculates the tax portion by taking your annual tax bill, dividing it by twelve, and collecting that amount from you each month. 

This system ensures your taxes are paid, but it also means your monthly payment can change if your property taxes increase. What else do you need to know about FHA home loans and property taxes? We examine some important points below.

What can I do to prepare for property taxes before I buy a home?

You should not rely only on the seller's current tax bill, as a sale can trigger a reassessment that increases the taxes. Contact the local tax assessor’s office to ask about the assessment process and the potential tax liability for the property at your purchase price.

This will give you a more accurate forecast of your future costs. You should create your budget based on this more realistic tax estimate.

Do I have to pay property taxes at closing?

You will likely reimburse the seller for any property taxes they have already paid for the time you will own the home. You must also make the initial deposits into your new escrow account. This requires you to pay several months of property taxes and homeowners' insurance upfront to ensure the account has enough funds to make the first payments when they are due.

Why did my monthly mortgage payment increase if I have a fixed-rate loan?

Your payment likely increased because of an escrow shortage. A lender performs an analysis of your escrow account each year. If your property taxes went up, the amount collected in the previous year was not enough to cover the new, higher bill. 

The lender pays the difference but requires you to make up the deficit. You can either pay a lump sum or have your monthly payment increased for the next year to cover both the shortage and the higher tax rate.

What happens if my lender collects too much for property taxes?

This situation is called an escrow surplus. During the annual analysis, if the lender determines there is more money in the account than needed, they are typically required to return it to you. If the surplus is more than $50, you will usually receive a refund check. If the amount is less than $50, the lender may credit it toward your mortgage payments for the next year.

What is a homestead exemption and how do I get one?

A homestead exemption is a common tax-saving measure that can lower your property tax bill. It works by reducing the assessed value of your home by a certain amount, as long as the property is your primary residence. You are only eligible for this exemption on one property.

To receive it, you typically have to apply through your local county or municipal tax assessor's office after you have purchased and moved into your home.

As a homeowner, how can I manage my property tax costs?

Read your annual escrow analysis from the lender to understand why your payment is changing and to anticipate future increases. Consider creating a separate savings fund to cover potential escrow shortages. 

You should also consider managing the tax bill itself. Review your annual assessment notice for accuracy. Is the value is too high? If so, file an appeal with your local review board. You should also investigate all available property tax exemptions, such as those for a primary residence, veterans, or senior citizens.