New Construction Property Taxes in Texas: Why Your Escrow Looks the Way It Does

If you are buying a newly built home in North Texas, your first property tax bill will likely be a fraction of what the home costs in taxes long term. It is one of the questions I hear most from new-construction buyers: “Why is my escrow so high when the tax bill is so low?”

The short answer: the county is taxing a vacant lot, and your lender is collecting for a finished house. Here is how that works, what it does to your payment, and which Texas exemptions bring the number down.

Why Your First Tax Bill Is So Low

Texas appraisal districts value property as of January 1 each year. If your lot was bare dirt on January 1, it is taxed as bare dirt for that entire tax year, even if you move into a finished home in June.

The sequence usually runs like this:

1. January 1: the appraisal district values the lot. No house, so no improvement value.
2. During the year: the builder finishes the home and you close.
3. October: tax bills go out, based on the January 1 land-only value.
4. Next January 1: the finished home goes on the roll at full value.
5. The following October: your first full-value bill arrives.

One caveat: if construction was already under way on January 1, the district can value the partially built home. Your first bill then lands somewhere between land-only and full value.

How Your Lender Sets Up Escrow

On a typical mortgage, we collect property taxes on the improved value from day one. Your escrow account takes one-twelfth of the estimated annual tax bill with each monthly payment, then pays the county when the bill comes due.

On an existing home, the estimate is easy: we use last year’s bill. A new home has no bill for the finished house, so we build the estimate from three pieces:

• Improved value: the lot plus the house, generally your purchase price.
• Estimated tax rate: the combined rate for every taxing unit on the property, including the school district, city, county, and any MUD or PID.
• No exemptions: your homestead exemption has not been granted yet, so we cannot count on it.

Federal escrow rules allow this. For unassessed new construction, a servicer may base its estimate on comparable homes in the area. Underwriting also qualifies you on the fully improved tax figure, so the payment you were approved at already assumes it.

Option One: Escrow on the Improved Value

This is the standard setup, and it produces a refund. You pay the full estimated amount every month, the first bill comes in at land value, and the account ends up holding far more than it needed.

Your servicer reviews the account once a year. Under federal rules, a surplus of $50 or more must be refunded within 30 days of that analysis, as long as your payments are current. You get a check.

• The upside: your payment starts where it will stay. No catch-up, no surprise.
• The downside: you pay more in year one than the county asked for, and that money sits in escrow until the refund.

One thing to watch: after the refund, some servicers reset your escrow using the small land-only bill they just paid. That lowers your payment for a year and sets up a shortage when the full bill arrives. If your payment drops sharply after the first analysis, call your servicer before you count on it.

Option Two: Escrow on the Unimproved Value

The alternative is to collect on the land value only, and it trades a low payment now for a steep one later. Underwriters do not like this setup, and the reason is what happens in year two.

Your payment starts low because escrow matches the land-only bill. Then the full-value bill arrives. The servicer pays it, and your account is short by thousands of dollars. At the next escrow analysis, two things hit your payment at the same time:

1. The going-forward increase: monthly escrow rises to cover the full tax bill from now on.
2. The catch-up: the shortage is added on top, usually spread over 12 months.

That is the double whammy. Most servicers will let you pay the shortage in a lump sum, which removes the catch-up. The going-forward increase stays either way.

What It Looks Like in Dollars

On a $500,000 new build, option two raises the monthly payment by about $1,210 in year two. Option one lowers it by about $128.

The example assumes a $100,000 lot, a 2.2% combined tax rate with 1.1% of that going to the school district, and a homestead exemption filed after closing. Figures cover the tax portion of escrow only and are rounded.

	Escrow on improved value	Escrow on unimproved value
Monthly tax escrow, year one	$917	$183
First tax bill (land only)	$2,200	$2,200
After the first bill	About $8,800 surplus, refunded	No surplus
First full-value bill, with homestead	$9,460	$9,460
When the full bill hits	Account is funded	$7,260 shortage
Monthly tax escrow after analysis	$788	$1,393 for 12 months, then $788
Change in monthly payment	Down about $128	Up about $1,210

Without a homestead exemption on file, the option-two jump is closer to $1,467 a month. Your own numbers depend on your closing date, your taxing units, and the cushion your servicer holds.

Texas Exemptions That Lower the Bill

The homestead exemption is the big one: it removes $140,000 of your home’s value from school district taxes. Texas voters raised it from $100,000 in November 2025. My Texas Homestead Exemption Guide covers it in full.

Homestead Exemption

• What it saves: in the example above, $140,000 at a 1.1% school rate is $1,540 a year, or about $128 a month.
• Where it applies: the $140,000 is mandatory for school districts only. Cities, counties, and special districts may add their own exemption of up to 20% of value.
• Who qualifies: you own the home, live in it as your principal residence, and claim no other homestead.
• When it starts: you do not have to wait for the next January 1. A buyer who qualifies mid-year can receive it for the rest of that tax year, as long as the prior owner did not have it. A builder would not.
• How to file: Form 50-114 with your county appraisal district. Filing is free, and the general deadline is before May 1.
• The added benefit: a homestead also caps how fast your appraised value can rise, at 10% a year, starting the year after you qualify.

Age 65 or Older, or Disabled

School districts must give an additional $60,000 exemption, for $200,000 in total. School taxes on the home are also frozen at a ceiling once you qualify. Disability here means meeting the Social Security Administration’s definition.

Disabled Veterans

A veteran with a 100% disability rating, or a rating of individual unemployability, pays no property tax on a residence homestead. Veterans with lower ratings receive a partial exemption that varies with the rating. Certain surviving spouses qualify as well.

If you expect to qualify for either of these, tell me before we finalize your numbers. It can change how we document your taxes.

What to Do After You Close

1. File your homestead exemption as soon as you move in. Use Form 50-114 with your county appraisal district. It costs nothing to file.
2. Add any other exemption you qualify for. Over-65, disability, and 100% disabled veteran exemptions use the same form. Partial disabled veteran exemptions use Form 50-135.
3. Expect a refund if we escrowed on the improved value. It comes after your servicer’s first annual escrow analysis.
4. Ask for a new escrow analysis once the exemption posts. When the appraisal district shows your homestead, your servicer can recalculate your payment.
5. Read every escrow statement. A payment that drops sharply in year one or jumps in year two is worth a phone call.

Common Questions

Why can’t you use the actual tax bill?
The only bill that exists is for the vacant lot. Collecting on it would leave your account thousands short when the full-value bill arrives.

Will I get the extra escrow money back?
Yes. A surplus of $50 or more must be refunded within 30 days of the annual escrow analysis, provided your payments are current.

Can I choose the lower, land-only escrow?
Sometimes. It depends on the loan program and the underwriter, and most prefer not to. If it is available, go in knowing the year-two payment will rise twice over.

When does my homestead exemption lower my payment?
After the appraisal district grants it and your servicer runs a new escrow analysis. It does not happen automatically at closing.

Does the homestead exemption cut my city and county taxes too?
The $140,000 applies to school district taxes. Other taxing units may offer their own exemption, so check with your appraisal district.

Is the first bill always land only?
No. If the home was partly built on January 1, the district can tax the partial value.

The Bottom Line

A low first tax bill on a new home is a timing quirk, not a discount. Plan your budget around the full-value bill, file your homestead exemption right away, and treat any escrow refund as your own money coming back.

Sources

• Texas Comptroller: Property Tax Exemptions for homestead, age 65 or older, disabled, and disabled veteran exemption amounts and filing rules
• CFPB: Regulation X, 12 CFR 1024.17, Escrow accounts for surplus refunds, shortage repayment, and new-construction estimates

This article is general education, not tax or legal advice. Tax rates and exemptions vary by taxing unit, and example figures are illustrative. Confirm your own details with your county appraisal district.

Homewood Mortgage, LLC | NMLS #294974 | Wayne Wallace NMLS #745186 | Licensed in Texas | This is not a commitment to lend.