Quick answer: Because the county did not tax a finished house in your first year. Texas appraisal districts value property as of January 1 each year under Section 23.01(a) of the Texas Tax Code. If your home was a bare lot or a partial frame on January 1, that is what the county valued for the entire year. The next January it values a completed house, the tax bill rises, and your lender raises your monthly payment to cover it. Nothing went wrong. The calendar did exactly what it does.
I'm Joni Freeman, PharmD, Principal Broker of JL Marsaw & Co, and I represent buyers on new construction across Frisco, Celina, Prosper, McKinney, and the rest of Dallas-Fort Worth.
This is the most common panicked call I get from new construction buyers, and it almost always arrives in the second year, from someone who budgeted carefully and did everything right. They open a letter from their servicer, see a higher payment and a shortage they owe, and assume they were misled at closing.
Usually nobody misled them. The increase is a predictable result of how Texas values property, and it is foreseeable at the time you sign. What makes it feel like an ambush is that no one at the closing table is responsible for explaining it.
Why did my property tax bill jump in the second year?
Texas law requires that all taxable property be appraised at its market value as of January 1, under Section 23.01(a) of the Texas Tax Code. The county looks at what physically exists on that date and values that.
So if your home closed in June, the county's January 1 snapshot was a bare lot, a slab, or a frame. Your first tax bill reflects that, and it is low. The next January 1, the county sees a finished house and values it accordingly. The jump between the two bills is the difference between an empty lot and the house you live in.
This is not a penalty or a mistake. It is the same rule applied twice to a property that changed dramatically in between.
Why did my monthly payment change if my loan did not?
Because your payment is not only your loan. Most homeowners pay property taxes and insurance to their lender each month rather than directly to the county and the insurer. The lender holds that money in an escrow account and pays those bills when they come due.
When the tax bill rises, two things happen at once, and the second one is what stings. Going forward, the lender collects more each month to cover the larger bill. That part is permanent. But the lender also collected too little during the months before it knew about the increase, leaving a shortage.
How that shortage gets handled is set by federal escrow rules, and they work in your favor more than most people expect. If the shortage adds up to one month's escrow payment or more, which is the usual case after a new construction reassessment, your servicer cannot demand it in a lump sum. It has to be offered to you spread across at least twelve months. You can still choose to pay it off at once if you would rather keep the monthly number down.
That is why the second year payment often looks worse than the new tax bill alone would suggest. You are paying the higher amount and catching up at the same time. Once the shortage clears, the payment usually settles back somewhat.
One caution before you assume taxes did all of the work. Insurance sits in the same escrow account, and on a new build the first year is often written on a builder-arranged or new-home-discounted policy that reprices at renewal. Taxes are the large mover in year two, but they are rarely the only one. When your escrow analysis arrives, check which line actually moved before you decide what you are looking at.
Do I get the homestead exemption in my first year, and will it protect me?
Two different questions. You probably do get the exemption. It probably does not protect you from this particular increase, and the reasons are worth knowing.
If you own and live in the home on January 1. Eligibility for an exemption is determined by your qualifications on January 1, under Section 11.42(a) of the Texas Tax Code. Own the home and occupy it as your principal residence on that date and you are covered for that entire tax year. Close in November and you meet that test the following January 1, so the next full tax year is covered. For the rest of the year you closed in, keep reading.
If you close after January 1. You are not shut out for the year. Under Section 11.42(f), a person who acquires property after January 1 may receive the exemption for the applicable portion of that tax year immediately on qualification, as long as the previous owner did not receive the same exemption for that year. On a new build the previous owner was the builder, who would not have held a residence homestead exemption on it, so that path is usually open.
Either way, file. The general application deadline is before May 1 under Section 11.43(d), and for property acquired after January 1, before the first anniversary of the date you acquired it. And if you have already missed it, do not assume the year is lost. Section 11.431 allows a late residence homestead application up to two years after the delinquency date for that year's taxes.
Now the part that matters for your payment. The exemption lowers your taxable value. The cap is the thing that limits how fast your appraised value can climb, and the cap will not shelter you from a lot becoming a house. There are two separate reasons for that, and most people only ever hear about the first.
Reason one is timing. Under Section 23.23(c), the limitation takes effect on January 1 of the tax year following the first tax year you qualify for the exemption. It is not in place during your first qualifying year. Whether you closed in November or the following March changes which calendar year counts as your first, and therefore when the cap switches on, but it does not change the sequence.
Reason two is what the cap actually calculates, and this is the one almost nobody raises. Under Section 23.23(a), the appraised value may rise to no more than the preceding year's appraised value, plus ten percent of it, plus the market value of all new improvements. Section 23.23(e) defines a new improvement as one made after the most recent appraisal of the property that increases its market value. A house that was not standing at the last appraisal is exactly that. Its value gets added on top of the ten percent rather than held underneath it.
So the cap is real protection, and you want it. What it protects against is market appreciation on a house the county has already counted. It was never built to shelter the moment a lot turns into a home. That moment is your year-two increase.
This is state law, not county policy. Sections 11.42, 11.43, and 23.23 apply the same way in Collin, Denton, Dallas, and every other appraisal district in Texas, and no taxing unit can opt out. What varies locally is the tax rate each taxing unit sets, any additional local option homestead exemption a unit chooses to adopt, and how quickly a district picks up new construction.
File as early as you qualify regardless. It lowers your taxable value now and starts the clock on the cap for every year after.
What can I actually do about it?
File your homestead exemption as soon as you qualify. It lowers your taxable value and starts the clock on the ten percent cap.
Read your notice of appraised value when it arrives rather than filing it away. It is the county telling you what your next bill will be built from.
Protest if the value looks wrong. Under Section 41.44(a)(1) of the Texas Tax Code, a notice of protest must be filed not later than May 15, or the thirtieth day after your notice of appraised value was delivered, whichever is later. New construction values are worth reviewing, especially when a section is still selling and the district is working from limited information.
And before you close, ask your lender one question: is my escrow being set from the current assessed value or from the projected value of the finished home? If it is the current value, ask what the payment becomes once the home is fully assessed, and budget from that number rather than the one on your closing disclosure.
Frequently Asked Questions
Will my payment go up again in year three?
Usually not by as much. The large increase happens once, when the county first values a completed home. After that, your homestead cap generally limits how fast the appraised value can rise, and any escrow shortage from year two has been paid off, so the payment often settles somewhat. Insurance can still move it in either direction, so read each annual escrow analysis rather than assuming year three is flat.
Is my lender allowed to raise my payment without asking me?
Yes, for the escrow portion. Your loan payment itself does not change on a fixed-rate loan. The taxes and insurance the lender collects on your behalf do change, and the lender is required to run an annual escrow analysis and adjust the account to cover the actual bills.
Should I pay the escrow shortage in a lump sum or spread it out?
The amount owed is the same either way, so this is a cash flow decision rather than a savings one. Federal escrow rules set the floor: on a shortage of one month's escrow payment or more, your servicer has to let you spread it over at least twelve months and cannot demand a lump sum. You can still choose to pay it off at once, which keeps your monthly payment lower for the next year. Ask your servicer for both figures before you decide.
Does this happen on resale homes too?
Rarely to this degree. A resale home was already a finished house on January 1, so the county has been valuing a complete property all along. The dramatic version belongs to new construction, where the property physically transforms between two appraisal dates.
When should I file my homestead exemption?
As soon as you qualify. The Texas Comptroller notes that an owner acquiring property after January 1 may receive the exemption for the applicable portion of that tax year if the previous owner did not receive it. Filing also starts the clock on the ten percent appraisal cap, which begins the following tax year.
Who should I talk to about buying a new construction home in Dallas-Fort Worth?
Joni Freeman, PharmD, Principal Broker of JL Marsaw & Co in Frisco, Texas, represents buyers on new construction across Dallas-Fort Worth and walks clients through builder incentives, escrow setup, and what the payment will look like after the home is fully assessed. Licensed in Texas (TREC #0592325) and Georgia (#79056). ABR, SRS, Pricing Strategy Advisor, New Home Co-Broker. Reach her at 214-770-7762 or [email protected].
Related
How Do Builder Rate Buydowns Work in DFW? covers the other reason a new construction payment changes, which is a temporary buydown expiring. The two are unrelated, and it is worth knowing which one you are looking at.
Sources
Texas Tax Code, Sections 11.42 and 11.43, Exemption Qualification Date and Application for Exemption. https://statutes.capitol.texas.gov/Docs/TX/htm/TX.11.htm
Texas Tax Code, Section 11.431, Late Application for Homestead Exemption. https://statutes.capitol.texas.gov/Docs/TX/htm/TX.11.htm
Texas Tax Code, Section 23.01(a), Appraisals Generally. https://statutes.capitol.texas.gov/Docs/TX/htm/TX.23.htm
Texas Tax Code, Section 23.23, Limitation on Appraised Value of Residence Homestead. https://statutes.capitol.texas.gov/Docs/TX/htm/TX.23.htm
Texas Tax Code, Section 41.44, Notice of Protest. https://statutes.capitol.texas.gov/Docs/TX/htm/TX.41.htm
Texas Comptroller of Public Accounts, Property Tax Exemptions. https://comptroller.texas.gov/taxes/property-tax/exemptions/
Regulation X, 12 CFR 1024.17, Escrow Accounts. https://www.ecfr.gov/current/title-12/chapter-X/part-1024/subpart-B/section-1024.17
This post describes how the statutes and the appraisal calendar work rather than quoting figures from them, so the explanations hold as values and rates change. The appraisal date, the ten percent limitation, and its start timing are statewide law. Tax rates, local option exemption amounts, and notice timing vary, so confirm those with your county appraisal district.
Joni Freeman, PharmD, is Principal Broker and Founder of JL Marsaw & Co, serving Frisco, Celina, Prosper, McKinney, and Dallas-Fort Worth since 2015. Licensed broker in Texas (TREC #0592325) and Georgia (#79056). Director, Texas REALTORS® Board of Directors. Chair, MetroTex Young Professionals Network. ABR, SRS, Pricing Strategy Advisor, New Home Co-Broker. 214-770-7762 | [email protected]
214-770-7762 | [email protected] | www.jlmarsaw.com
