Have you heard of property tax abatements? Perhaps you know just what we’re talking about, you’re completely clueless, or you fall somewhere in the middle. In any case, this post will give you some must-know info about how a property tax abatement might play a role in your mortgage.

Conventional and FHA loans have different approaches to property tax abatements. Today we’re going to discuss these differences so that you are informed and empowered at the mortgage desk!

What Is a Property Tax Abatement?

Tax abatement programs significantly reduce the property tax payments on homes that offer them. Some neighborhoods (or even entire cities) offer property tax abatements to homebuyers as an incentive to revitalize the community.

Here’s how it works: Let’s say you purchase a recently-renovated home. If that home has a property tax abatement attached, you will be responsible for the pre-renovation tax payment for the duration of the abatement. After that period, your property tax payments will increase according to their value with the renovation.

Here’s another scenario: If you purchase a property in a tax abatement area, you can make improvements and apply for the abatement yourself.

Conventional Guidelines for Property Tax Abatements

When you’re house hunting, looking at homes with property tax abatements is a way to score more home for your money. If you apply for a conventional loan, the tax abatement period must last at least five years for the reduced property tax amount to count during the underwriting process.

Are you confused? Here’s an example: If the property that you’re considering has a 10-year tax abatement with a graduating tax increase, the underwriter will use the payment schedule after the fifth year for qualifying purposes.

The FHA’s Turn! Understanding Their Approach To Tax Abatements

The FHA uses a different method to account for property tax abatements during the underwriting process. Here is the info they need to complete the calculation:

  • Tax abatement amount and length
  • Interest rate
  • Mortgage insurance premium (MIP)
  • Debt service rate

The FHA divides the annual abatement by the debt service rate to arrive at the additional mortgage amount. A special amortization schedule is required to account for the abatement term.

Contact Us Today!

At MortgageDepot, we are here to help you understand the most complicated aspects of your mortgage. Contact us today to learn how a property tax abatement can benefit you!

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