My Lender Ignored a Very Legitimate DCURD Tax Exemption

Robert Shiller the Nobel prize winner on Economics, proved with a convincing chart that from 1890 to 2010, that house prices returned about zero if one excluding inflation.

http://pragcap.com/wp-content/uploads/2012/12/housing.png

Therefore a house is a lousy investment.

I concur with him. The house I purchase in Flower Mound, Texas in year 2000 cost me $240,000. Right now I have a contract on it for $315,000. After 14 years, it appreciated about 31% in total, or about 2% per year.

But most of us buy a house for reasons other than investment.

The gratification of putting a roof above oneself and the family cannot be measured with a price tag or rate of return.

According to Census Bureau, the US home ownership stands at 64.9%, at or near 18-year low. Still, most of us still end up with buying a home. (Read: http://economix.blogs.nytimes.com/2014/01/30/why-the-homeownership-rate-is-misleading/?_php=true&_type=blogs&_r=0)

I just bought recently. I have bought my current home and am the in process of selling my previous one.

Mortgage interest rate is low, in absolute terms; houses prices are relatively low, compared to the historical highs reached before the financial crisis.

Of course if you want to buy a house in places like San Francisco, where people put 70% of their income to pay mortgage, you will disagree with me on both mortgage rate and house prices.

But the home sale across the country is not taking off. Why?

Dow payment, rising interest, and lenders’ tight underwriting guideline are a few things blamed for the slow real estate market.

I have certainly experienced the effect of lenders’ tight underwriting guideline. When my lender, Provident Funding, questioned a very legitimate tax exemption on the housing, I thought they have gone too far.

Taxing entities typically grant tax exemptions to people who use the house as a home – it is called “homestead exemption”.  In the city and county I am living, the homestead exemption is 20%. In other words, one does not have to pay tax on 20% of the appraised value.

But since when I purchased the new home I was still in ownership of the old home, the lender excluded the tax exemption in calculating how much mortgage I can afford.

That was fair enough, as I had not sold the house yet, no had I put the house for sale.

The house I was going to purchase locates in an area called “Dallas County Utility and Reclamation District” (DCURD).  The name sounds very official. The truth is, it has nothing to do with Dallas County.  It is a master-planned district, called “Las Colinas”, a city within the city of Irving. In order to build canal and lake system in the area, a tax authority is established. Tax rate is about 1.8% of the property value, but for residential houses, the tax is virtually exempted.

If the tax is not exempted, it will make the tax burden on the house very unattractive.  Combined annual property tax rate will about 4% of the house.  It is like instead of paying for a 4% interest rate on the mortgage, I will be paying 8% interest rate.

The seller, who had owned the house for nine years, had enjoyed tax exemption each and every year.

But since it is virtually exempted, it should be a no-issue, right? Wrong?  Of course the Provident Funding personnel would not take my word for it. So I requested DCURD send them a statement, which states positively that my house is exempted from DCURD tax for the next 50 year and the DCURD tax rate itself is set to decline in the next five years or so.

No use. For qualification purposes, un-exempted tax rate will be use, said the mortgage underwriter.

After the financial crisis, it is understandable that lenders tighten the underwriting guideline; but to the extreme of tossing out a very legitimate tax exempt, I think they have gone too far.

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