Missing Exemptions Still Matter!

I've had a situation come up twice in the last month that has caused loan approval problems for my buyer in both cases, so I thought it might be a good one to share with my active buyers and Realtor partners as well.  Our topic today?  The impact of missing exemptions on a mortgage approval.

First, a little history….

If you’ve been in the Indiana real estate industry for a while, you’ll remember that the homestead and mortgage exemption (aka deductions) used to take a year or more to kick in when someone bought a home.  This was a major problem for buyers wanting to buy a home that had no tax exemptions in place, because the buyer had to pay the existing higher tax bill until the county processed their ownership and dropped the bill to their lower, owner-occupant tax rate.

This rule changed a few years back and buyers were suddenly able to qualify for a homestead tax exemption immediately when buying a home. This was a HUGE win and, seeing the title company was willing to file for the homestead exemption for the buyer, the lender could now set the buyer’s mortgage payment based on the lower, projected property tax cost.   Suddenly, tons of homes with missing exemptions were back in play for buyers.  Realtors and lenders alike breathed a sigh of relief that this home-buying problem had been solved.

What you may not know, though…..

What many Realtors and buyers don’t know, though, is that the problem is only partially solved.  Yes, the buyer qualifies for the exemption right away and yes, the title company will file for it on behalf of the buyer.  There is no guarantee that the exemption will actually be put in place though.  The county may reject the application for some reason.  The paperwork could just get lost.  It happens - Alot.  Tax deductions that a buyer thought were filed are in fact still missing on their home.

Because of this, a lender will…..

Because of this, a lender will put some safeguards in the loan approval to make sure they’re still going to be ok if the exemptions don't stick when filed.  They will typically allow the buyer to set up their new mortgage payment based on the lower, projected tax rate but they will require that the buyer qualify for their loan at the higher, current tax rate.  If the buyer does not qualify for the loan with the tax bill at the higher, existing amount, the lender will decline the loan. 

How this can kill the purchase…..

This little nuance can kill a purchase if you’re not aware of it.  Given that, this is what a Realtor and buyer need to do when considering submitting an offer on a home:

1)       See how much the buyer is preapproved for

2)      Find out the property tax amount that the lender was using in the preapproval calculations

3)      If the property taxes are higher than the lender’s assumption, especially if the price of the home is close to the buyer’s ceiling, DO NOT WRITE AN OFFER ON THE HOME WITHOUT TALKING TO THE LENDER FIRST. 

Remember, it is the monthly payment that is driving the buyer’s approved amount, not the home price.  If taxes are higher, the monthly mortgage payment is higher, and they may no longer qualify.

If you have questions on this or on any other aspect of home financing, I'm happy to help.  Please drop me an email at lori.hiscock@ruoff.com or give me a call at 574-234-5201.