Dallas Fort Worth Area Homes and Real Estate

It seems the majority of buyers these days want to scoop up a foreclosure for a bargain price.  And many buyers are finding some great bargains in this market.   But buyers and agents need to know that in certain situations, they may have a problem qualifying for a loan on a foreclosure if the sales price is far below the tax appraised value.  This is true for any house that's selling below tax appraised value as well, but this seems to be a more common problem with foreclosures since they are often sold at far below tax appraised value.  Since debt to income ratios are based on the total PAYMENT and not just the sales price, the DTI can fluctuate depending on how much the taxes are on any given house. 

Here's an example of a loan I had recently that ran into a problem:

A buyer came to me wanting to get pre-approved for around $90,000.  I pulled his credit, ran him through automated underwriting and was able to secure an approval.  I based the tax estimate at 3% just to be ON THE SAFE SIDE in case the taxes ended up being a bit higher in the end.    So based on this estimate, automated underwriting calculated a debt-to-income ratio of 44%.  I knew just from looking at his credit scores, credit history and reserves that automated underwriting would probably NOT approve him if his DTI were to exceed 45%, so I told him and the realtor not to push the value or we might have a problem getting the loan closed and to also let me know before submitting an offer.  The taxes on a $90,000 home in Dallas County should be no more than around $2,500 per year ASSUMING the county has valued the property at close to the sales price. 

But what if they don't?  In this buyer's case, the home he ultimately chose showed a tax appraised value of $138,000 for a home that was selling for $85,000!  And, of course, it was a foreclosure selling at far below market price.  So what did that do to his debt-to-income ratio?  Blew it through the roof!  He was unable to qualify for the loan on this $85,000 house regardless of the fact that he was initially "pre-approved" for $90,000.  Again, debt to income ratios are based on total PAYMENT (PITI), not just the sales price and/or loan amount.  Since the taxes were much higher on this home, his DTI exceeded 47%, which was outside the boundaries of what automated underwriting would approve and too high for a manual underwrite.   

But as luck would have it, he ended up not even winning the bid on this house.  He did find another one (with a much lower tax appraised value) and did finally close.  If he had won the bid on the first house and I had failed to re-run automated underwriting, this could have turned into a disaster about a week before closing once the underwriter re-ran with the higher taxes.  

So this explains one reason why pre-approvals are not always 100% reliable.  This is ESPECIALLY TRUE for borrowers who are trying to qualify for as much house as they can possibly afford and are maxing out their DTI ratio limits.  It's always a good idea for lenders to re-check debt ratios once a buyer selects a property, and it's always good for realtors to be on the lookout for high tax appraised values.   Even if the borrower is lucky enough to qualify with the higher payment, they may not BE COMFORTABLE with the higher payment anyway.  So it's more important than just making sure they qualify. 

Obviously, in some circumstances, the buyer may be able to protest the tax value of the home once the new tax year rolls around.  But lenders WILL NOT accept this as a reason to lower the DTI since there's NO GUARANTEE that the borrower will protest or that they will be successful at convincing the appraisal district to lower the taxes.