How Property Taxes Can Affect Your Pre-approval

When getting pre-approved for a mortgage, most buyers focus on their income, credit score, and down payment. However, one key factor that significantly affects how much home you can afford is property taxes.

How Lenders Calculate Your Pre-Approval Amount

Lenders determine your pre-approval amount based on your debt-to-income (DTI) ratio. This ratio compares your monthly debts—including your estimated mortgage payment—to your gross monthly income. A higher DTI can reduce the amount you qualify for, while a lower DTI can increase it.

Your estimated monthly mortgage payment consists of four main components, commonly referred to as PITI:

• Principal: The amount borrowed.

• Interest: The cost of borrowing the money.

• Taxes: Property taxes assessed by your local government.

• Insurance: Homeowners insurance and possibly mortgage insurance.

The Role of Property Taxes in Mortgage Qualification

Property taxes vary by location and are based on the assessed value of the home. Because they are included in your total monthly mortgage payment, higher property taxes mean higher monthly housing costs. This can directly reduce the loan amount for which you qualify. For example:

• If you’re approved for a total monthly mortgage payment of $2,500 and property taxes are $500 per month, that leaves $2,000 for your principal, interest, and insurance.

• If the property taxes are $800 per month, then only $1,700 is left for principal, interest, and insurance—potentially lowering the home price you can afford.

Why Property Taxes Differ and What You Can Do

Property tax rates vary widely depending on the state, county, and even neighborhood. A home in a high-tax area may be significantly more expensive to own than a comparable home in a lower-tax area. Additionally, tax assessments can increase over time, further impacting your affordability.

Ways to Manage Property Tax Impact:

• Research before you buy: Look up property tax rates in different areas to see where you might qualify for more house.

• Consider tax exemptions: Some states offer property tax exemptions for veterans, seniors, or first-time homebuyers, which could lower your tax burden.

• Work with a mortgage professional: A knowledgeable mortgage broker or lender can help you calculate how property taxes affect your buying power and explore loan options that fit your budget.

Final Thoughts

When shopping for a home, don’t overlook property taxes as part of your total housing cost. A home with higher taxes could limit how much you qualify for, while a home in a lower-tax area may allow you to afford more. Understanding how taxes influence your pre-approval helps you make informed decisions and find a home that fits your financial goals.

If you have questions about mortgage pre-approval and how property taxes play a role, reach out to a trusted mortgage professional to get personalized guidance!