"Buying a California Home: How Do I Read the Mello-Roos Notice of Special Tax Before I Sign?"

The sales office in Menifee, California, has the model home staged down to the lemons in the bowl, and the price is a few thousand dollars under the resale you toured that morning across Riverside County. Then the agent slides a one-page form across the table with "NOTICE OF SPECIAL TAX" printed across the top and asks you to sign that you have read it. The number in the middle of the page is annual, it is on top of the regular property tax, and it can run for decades.

Before you sign a purchase contract on a California home inside a Community Facilities District, state law requires that you be given a written Notice of Special Tax. It shows the current annual amount, the maximum, the allowed yearly increase and how long it can be collected. If the notice reaches you late, you have three days after hand delivery, or five days after mailing, to terminate in writing.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, including California, NMLS #483943, through C2 Financial Corporation.

The pages for buying a home in the Inland Empire, buying a home in Los Angeles and Orange County and buying a home in the San Francisco-Oakland area explain what a Community Facilities District is and where the districts cluster.

The Mello-Roos line on a California property tax bill

A city, county, school district or other local agency formed a district to pay for the roads, schools, parks and utilities a new neighborhood needed, and the homes inside it carry a special tax to repay the bonds. The Mello-Roos Community Facilities Act of 1982, Government Code section 53311 and the sections that follow, is the law that lets them do it. The California Debt and Investment Advisory Commission's overview of the Act explains that formation takes a two-thirds vote of the qualified electors, and that the tax is set by a formula rather than by assessed value.

Merced County's Mello-Roos page adds that a lien is recorded against each parcel when the district forms and that the tax is collected on the county property tax bill, so it follows the home from owner to owner.

Who has to give you the Notice of Special Tax in California?

Two statutes apply, depending on whether you are buying from the builder or from a prior owner.

If you are buying a new home from the builder and the lot is inside a special tax district, the builder cannot sell it to you until you have been given the notice and have signed it. That includes letting you sign a purchase contract or a deposit receipt. The rule is Government Code section 53341.5, and it also sets the form. It carries the heading "NOTICE OF SPECIAL TAX," states the maximum amount of the tax for the current tax year, and lists the facilities and services the tax pays for. It tells you in capital letters to take both into account in deciding whether to buy.

Buying a resale. Civil Code section 1102.6b applies when the home you are buying already carries a Mello-Roos special tax lien. The seller has to make a good faith effort to get a disclosure notice from each agency that charges a special tax on the home, if the agency offers the notice, and give it to you. The same section puts no duty on the seller or the agents to discover a district they do not actually know about, so the parcel's own tax bill is the check on whether the notice is complete.

The agency behind the notice. Government Code section 53340.2 requires each agency that charges a special tax to provide a Notice of Special Tax within five working days of a request, for a fee the statute caps at fifteen dollars.

The five figures to read on the notice

Civil Code section 1102.6b spells out what a resale notice has to contain, and the list doubles as your reading guide.

1. The name of each district. A newer home can be inside two of them, one for facilities and one for ongoing services.
2. The current annual special tax. This is the figure on this year's bill, and the one I divide by twelve when I build your payment.
3. The maximum annual special tax. The gap between current and maximum is the room the district has to raise the bill.
4. The allowed annual increase. The form in Government Code section 53340.2 reads "this amount may increase by," with the escalator filled in.
5. The last tax year it can be levied. The same form says the tax "may be levied until" a stated tax year. That end year tells you how many more years of the tax you would be paying.

If a figure is blank, please ask the agent or escrow to get the completed notice from the agency rather than signing around the gap.

The termination window if the notice arrives late

For a new home, Government Code section 53341.5 sets the window. If the notice reaches you late, you have three days to cancel in writing if it was handed to you, or five days if it was mailed, and the written cancellation goes to the builder or the builder's agent. The same section says a missing notice does not cancel the sale on its own, so once the three-day or five-day window closes, a late notice does not undo the purchase.

If you are buying a resale, the Mello-Roos notice is one of the seller disclosures California requires on a resale. Civil Code section 1102.3 covers what happens when one of those reaches you after you have signed an offer. You have three days to cancel your offer in writing if the disclosure was handed to you, or five days if it was mailed, and the cancellation goes to the seller or the seller's agent. The current text also covers a disclosure sent to you by email or e-signature, so please write down the date and the way each one reached you.

The clock runs from delivery, so a notice handed to you at the signing table starts a three-day count that day. Your agent and, if you have one, your attorney confirm the count on your file. My job is to make sure the number on that notice is in your payment before you decide.

The Mello-Roos line in the payment a lender qualifies you on

Fannie Mae's Selling Guide, B3-6-03, Monthly Housing Expense for the Subject Property, lists "special assessments" in the monthly housing expense beside principal and interest, taxes, insurance, ground rent and association dues. A Mello-Roos special tax is a special assessment for this purpose, so it goes into the payment used for your debt-to-income ratio, which compares your monthly debt payments with your monthly income. The same section tells the lender to project the taxes on a purchase where a transfer typically resets the assessment. A California purchase resets the assessment to your price, and the supplemental property tax bill is the bill that reset produces after closing.

Freddie Mac's Guide, section 5401.1, lists "special assessments with more than 10 monthly payments remaining" among the expenses that must be included in the monthly housing expense, and a special tax that runs for decades clears that threshold on every file.

FHA's Handbook 4000.1, in the section on the final underwriting decision, puts "special assessments" in the total mortgage payment beside taxes, insurance, the mortgage insurance premium, association fees and ground rent.

VA's Lenders Handbook, Chapter 4, in the instructions for the Loan Analysis form, is the most direct of the four: "If special assessments are anticipated, use the anticipated amount."

So the figure I use is the current annual special tax from the notice or the parcel's tax bill, divided by twelve. If the notice shows an escalator that will raise next year's bill, VA's rule is to use the anticipated amount. Because the special tax is collected on the county tax bill, an escrow account that pays your property taxes pays the Mello-Roos line with them, and the guide to escrow accounts covers how that deposit is set. The special tax does not change the price, the loan amount or the down payment, and beyond the escrow deposit it is not part of your cash to close.

The steps, in order, for a California purchase

1. Before you tour a new community or write on a newer resale, please ask the agent whether the home is inside a Community Facilities District, and for the parcel's current tax bill.
2. You'll want the Notice of Special Tax in hand before you sign a contract or a deposit receipt.
3. Please read the five figures against the list above. Then please provide the complete Notice of Special Tax and the current property tax bill for the home, all pages, so the special tax goes into your payment before you decide.
4. If the notice reaches you after you have signed, please note the date and the way it was delivered, and talk with your agent the same day about the three-day or five-day window.
5. Once you have chosen a rate option with the special tax in the payment, that selection can change, so please tell me if the figures on the notice change during escrow.

Three things to check before you sign

The builder's payment sheet and the special tax. You'll want to look for the district on the builder's payment sheet, because it can show principal, interest, taxes and insurance and nothing for the district. Your qualifying payment includes it, so the two figures will not match.

The maximum and the current amount. You'll want to read these two figures side by side. A district with room under its maximum, plus an annual escalator, can bill more next year than it bills today, and the notice shows both figures so you can see the room.

The parcel's tax bill and the notice. You'll want to read the tax bill beside the notice, because the bill shows every line. The seller and the agents have no duty under Civil Code section 1102.6b to discover a district they do not actually know about.

An illustration, so the arithmetic is clear

Figures below are made up to show the mechanism. This is not a real file and not a quote.

A couple is choosing between a new home in Menifee and a resale in an older Riverside neighborhood, both priced at $620,000. The Menifee Notice of Special Tax names two districts. The facilities district is $3,000 a year, with a $3,400 maximum rising two percent a year until the 2054-55 tax year, and the services district is $600 a year with no escalator.

Facilities district, current annual       $3,000
Services district, current annual         $  600
                                          ------
Total special tax, annual                 $3,600
Divided by twelve                         $  300 a month

On the couple's $11,000 of monthly qualifying income, that $300 adds about 2.7 percentage points to their debt-to-income ratio, and their escrow deposit and monthly escrow payment are both higher by that line. The price, the loan amount and the down payment are identical on both homes.

They sign in the sales office on a Saturday and the notice is handed to them at the table, so their three-day window runs through Tuesday. They send me the notice that afternoon, the payment still fits, and they let the window pass. Had the number changed their mind, the same statute would have let them walk away in writing by Tuesday.

Your next steps

If you are shopping in California, the rate tool is here when you want to see it with your own numbers. You'll see rates priced for your own scenario, with closing costs built for California rather than a national average, and you can choose a rate option and change it later. No credit pull, no account, nobody calls you. The California page covers escrow, transfer tax and who handles the closing, and pre-approval in California explains why the letter should be built for the actual city and parcel, special tax included.

Nothing here is a loan approval, a denial, a commitment to lend, or legal or tax advice. The notice requirements and the termination windows belong to the statutes cited above, and the special tax on a specific parcel is set by that district, so please confirm the figures with the agency and the county treasurer-tax collector.

Common questions

Does a California seller have to give me a Mello-Roos notice before I sign?

Yes. For a new home, Government Code section 53341.5 says the builder cannot sell you a lot inside a special tax district until you have received and signed the Notice of Special Tax. That includes letting you sign a purchase contract or a deposit receipt. For a resale of a home with a Mello-Roos lien, Civil Code section 1102.6b requires the seller to make a good faith effort to get the notice from each agency that charges the tax and give it to you.

What does the Notice of Special Tax have to show?

Civil Code section 1102.6b requires the notice to identify each Mello-Roos district, the current annual special tax, the maximum special tax, the allowed annual increase and how long the tax can be levied. The new-home form under Government Code section 53341.5 also lists the facilities and services the tax pays for.

How long do I have to cancel if the Mello-Roos notice arrives after I sign?

For a new home, Government Code section 53341.5 gives you three days to cancel in writing if the notice was handed to you, or five days if it was mailed. The cancellation goes to the builder or the builder's agent. For a resale, Civil Code section 1102.3 gives you the same three or five days to cancel your offer in writing when a required disclosure arrives after you signed the offer, including one sent by email or e-signature.

Is Mello-Roos included in my debt-to-income ratio?

Yes. Fannie Mae's Selling Guide B3-6-03 lists special assessments in the monthly housing expense used for the debt-to-income ratio, and Freddie Mac's Guide 5401.1 includes those with more than 10 monthly payments remaining. FHA Handbook 4000.1 puts them in the total mortgage payment, and VA's Lenders Handbook Chapter 4 says to use the anticipated amount. The lender takes the annual special tax from the notice or the tax bill and divides it by twelve.

Does my escrow account pay the Mello-Roos special tax?

Usually, yes. The special tax is collected on the county property tax bill, so an escrow account that pays your property taxes pays the Mello-Roos line along with them. The supplemental property tax bill is different, because the county mails that one to you rather than to the lender.