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Th e M Rep o RT | 21 Feature W ith every mortgage loan closing, lenders across the country are faced with the problem of trying to accurately predict property tax obligations for their borrowers. Estimates must take into consideration a locale's specific range of possible tax impacts, including the assessed value of the property, local government parcel taxes, taxes associated with voter-approved infrastructure debt, and other relevant factors. While property tax estimates are always difficult to accurately predict, in some states—particularly in California—the estimates are usually incorrect. As expected, inaccurate prop- erty tax estimates that surprise homeowners with an increase in their monthly payments can lead to considerable customer dissatisfaction. Most borrowers have a budget for their closing costs, along with a budget for the numerous other home purchase- related expenses, such as moving, utilities, new furniture, and so on. Any unexpected and signifi- cant monetary obligation can cre- ate a substantial financial strain. Property tax estimates are not just required at the closing table. They are also needed by many other professionals along the mortgage continuum—including Solving the Problem of Property Tax Estimation real estate sales professionals who want to inform prospective buyers what their tax bill is likely to be, loan officers who need to calculate accurate debt-to-income ratios, and servicers that are onboarding loans and must make sure everything is accurate right from the start. How Serious Can It Be? I naccurate property tax estimates can make a big difference in affordability for homeowners or prospective homeowners. Here are two examples: 1. A borrower applies for a mortgage loan on a $960,000 home in California. The real estate taxes are predicted to be $12,000, using the standard formula of multiply- ing the sales price by 1.25 percent. However, due to several bonds, as well as special assessments that go up as the home's assessed value increases, the actual tax bill amount is $21,120. As a result, a few months after the loan closes, the homeowners are asked to pay a $9,120 shortage in their escrow account and informed that their mortgage payment will increase by $760 a month. 2. Another borrower applies for a $500,000 loan in Florida and is turned down due to his slightly high debt-to-income ratio, which is 44 percent. The ratio is high because the predicted annual tax bill is $6,250 per year, but the actual tax bill would have only been $5,000. The additional $1,200 difference causes the prospective owner to lose an opportunity to buy the home he wants. While these examples represent worse-than-average scenarios, errors similar to these may be more com- mon than people realize. Clearly, mistakes in property tax estimates can be much more than an incon- venience. In some cases, they can be devastating for the homeowner or prospective homeowner. Why Is Property Tax Estimation so Difficult? A ccurate property tax estimation can be difficult Property tax estimates are critical to the homebuyer experience and peace of mind. Errors in these estimates can be avoided with sound strategy and business fundamentals. By Mark Collins, SVP, Property Tax Direct, Black Knight Financial Services