The Mortgage Interest Tax Deduction
Introduced along with the income tax in 1913, the mortgage interest tax deduction has since become the favorite tax deduction for millions of U.S. homeowners. Here we look at the existing rules behind this deduction, as well as what its future may be in the face of proposed tax reforms.
- Pre-October 13, 1987, Debt: If you took out your mortgage prior to this date, you can deduct the full amount of all interest paid. Mortgages taken out prior to October 13, 1987, are referred to as “grandfathered debt”.
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Post-October 13, 1987, Debt: Interest on a mortgage taken out to buy, build or improve your home after October 13, 1987, may be fully deducted only if the total debt from all mortgages, including any grandfathered debt, amounts to $1 million or less for married couples and $500,000 or less for singles or married couples filing separately.
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Home Equity Debt Post-October 13, 1987: Mortgages taken out after October 13, 1987, for reasons other than to buy, build or improve your home must total $100,000 or less for married couples and $50,000 or less for singles or married couples filing separately. They must also total less than the fair market value of your house minus the value of all grandfathered debt and all post-October 13, 1987, mortgage debt
If you managed to follow that logic without getting confused, you are in good shape so far – but don’t start your deductions yet. There are additional stipulations. Even if you qualify for the deduction based on the criteria outlined above, you cannot take the deduction unless your mortgage is classified as secured debt, which means that your home must serve as collateral for the debt. If it is unsecured debt, it is considered a personal loan, and the interest on it is not deductible.
The Definition of “Home”
The next hurdle that you need to cross is ensuring that your property is a “qualified home”. In order to meet this definition, the property must have sleeping, cooking and toilet facilities. Items that fit this definition can include your primary residence, a second home, a condominium, a mobile home, a house trailer or a boat.
If your home is a second home, you can deduct the interest from only one second home. You must use that property at least 14 days during the year. If your second home is a rental property, you must use it more than 10% of the time that the property is rented out. If your rental property does not meet these criteria, the interest cannot be listed on Schedule A and must instead be listed on Schedule E.
Refinancing
In recent years, falling interest rates have encouraged homeowners to refinance their mortgages. Refinancing provides an opportunity to reduce monthly mortgage payments, reduce the term of the loan, or both. When refinancing is done without taking on additional debt, all interest generated by the mortgage remains tax deductible. When homeowners use their homes as a piggy bank and refinance in order to take out equity to generate spending money – that is, for reasons other than to buy, build or improve their homes – the Home Equity Debt Post-October 13, 1987, rules apply. (For more on this, read Mortgages: The ABCs Of Refinancing.)
Proving It to the IRS
In the event of an audit by the Internal Revenue Service, you will need to have a copy of Form 1098, Mortgage Interest Statement, which should be provided each year by the firm that holds your mortgage. If you pay your mortgage payment to an individual, you will need to supply the name, Social Security number and address of the mortgage holder, in addition to the amount of interest paid. (For further reading, see Surviving The IRS Audit.)
Conclusion: What Does the Future Hold?
The home mortgage interest tax deduction is cherished by homeowners and despised by proponents of income tax reform. A panel appointed by President George W. Bush in 2005 recommended the abolition of this deduction as part of a larger effort to simplify the tax code. Flat-tax advocates also favor the demise of this deduction, and U.S. lawmakers on both sides of the aisle have been discussing a variety of tax reform schemes that generally involve the abolition of the mortgage interest tax deduction.
Fortunately (or unfortunately, depending on your point of view), homeowners are often older citizens who vote. President Bush is well aware of the power of this voting block and, in February of 2006, he responded to a question at a gathering in Florida by saying, “Maybe you’re hinting at whether or not the mortgage deduction would be part of a plan. I don’t think you have to worry about the mortgage deduction not being a part of the income-tax law.”
FHA StreamLine Loan Requirements
FHA Streamline loans can help homeowners lower monthly mortgage payments and interest rates. But what do you need to qualify for an FHA Streamline loan? To begin, you need an existing FHA mortgage-if you don’t have an FHA loan but want to refinance, your options include conventional refinancing or applying for an FHA refinancing loan.
If you have a conventional loan you wish to refinance with an FHA refinancing loan, you’ll need to apply with the usual credit check, employment verification, debt-to-income ratio requirements and other considerations. An FHA Refinancing loan can get you many of the same results-if you refinance from a conventional loan to an FHA-insured refinancing loan you may get better rates and lower payments.
For those who do have an FHA home loan, the other requirements for FHA Streamline include:
– Being current on the existing loan with all mortgage payments made on time for the last year.
-You must own the original property for at least six months before you can qualify for refinancing.
-To refinance you’ll need an FHA-approved lender. If you don’t want to use your current lender, any bank you choose must be FHA approved.
-FHA Streamline loans do not require an appraisal, but a no-appraisal loan cannot exceed your current loan.
-Closing costs must be paid up front or arranged for through a “no-cost” FHA Streamline loan. You may also choose to include the closing costs into your loan a “with appraisal” FHA Streamline loan. In these cases you must have enough equity in the home to cover the extra amount. There is another Streamline product made for those who want a refinancing plan to help them modify or improve the home. This is known as an FHA Streamline 203(k) Loan. The 203(k) is similar to ordinary Streamline loans with a few exceptions.
-The 203(k) has a minimum of $5,000. The maximum loan amount is $35,000. This amount is added to your mortgage for weatherizing your home, removing lead paint and many other home improvements that don’t involve major alterations of the home.
-You are required to use at least one contractor to do the repair work. Self-help renovations are not allowed unless the borrower can prove they have proper expertise.
-When choosing a contractor, FHA guidelines state you must get an estimate which is broken down into specifics regarding the costs of each project. Contractors must sign an agreement to do all the work included in the estimate for the amount and within the time specified.
-You must obtain all permits required by law.
There are restrictions on 203(k) Streamline refinancing loans. You cannot use the 203(k) loan to do major structural repairs such as altering a load-bearing wall or work that needs architectural plans. If your home improvement work exceeds $15,000 the FHA requires you to have a third-party inspection after the job is done.
You are permitted to make two payments to each contractor. If you do the work yourself as a qualified builder, the same rule applies.
When borrowing under the FHA Streamline 203(k) program you must “close out” the loan when the work is complete. According to FHA.gov, you may be required to furnish “mortgagor’s acknowledgement of satisfactory completion….mortgagee’s inspection report(s), change orders, mortgagee accounting of the escrow funds, and record of disbursements.” It’s important to keep records of these items and more to prove the work was completed according to the agreement and in a timely manner.
What Is The Mortgage Interest Credit?
Do I Qualify For The Mortgage Interest Credit?
Eligibility Requirements:
– You must have a Mortgage Credit Certificate from you state or local government. You must have this before you get a mortgage and buy your home.
– You must obtain a New Mortgage for the purchase of your Main Home That You Live At.
– The home must be located within the Governing Area of the state or local government agency that issued the certificate.
– The Credit Rate is the percentage used to caculate the mortgage interest credit, and is between 10% and 50% Of The Qualified Mortgage Interest you pay. The government agency who issues your MCC determines this credit rate.
– If the credit rate is greater than 20%, the mortgage interest credit is limited to $2,000 Per Year. The credit is limited by the Allowable Amount Of Mortgage Debt (also known as the Certified Indebtedness) that is shown on your MCC
EXAMPLE: If the amount of your mortgage loan is greater than the allowable debt on your certificate, then your credit is caculated based on interest paid on the allowable debt, not the total interest you paid on your full mortgage debt.
– The credit is limited based on the amount of Taxes You Owe Minus Any Credits. That means if the mortgage interest credit is bigger than what you owe in taxes , the credit reduces your taxes to zero. However, the remaining is not lost becasue you can carry forward for three years or until it is used up.
– If you cannot use all of the allowable mortgage interest credit, you can Carry Forward the unused portion of the credit over the next Three Years or until you’ve used up the credit, whichever comes first..
– You cannot claim the credit if you paid the interest to someone who is Related To You.
Special Circumstances Or Exceptions:
– If you purchase you home and claim the mortgage interest credit,and then Sell Your Home Within Nine Years, you might have to repay some of the credit that you took in prior years. Do this using FORM 8828, Recapture of Federal Mortgage Subsidy.
– If yo Refinance Your Mortgage , you must have a new mortgage credit certificate (MCC) to claim the credit on the new loan. Also, the new credit amount cannot exceed the original credit amount.
WHAT PAPERWORK DO I NEED FOR THE MORTGAGE INTEREST CREDIT?
To calim this credit, be sure to keep the following items For Your Records:
-Mortgage Credit Certificate (MCC) showing the credit rate and certified indebtness amount (the allowed amount of mortgage debt)
-Form 1098, Mortgage Interest Statement
-Your Prior Year’s Tax return if you are carrying forward any unused credit
FHA Loans – FHA Debt Ratio’s Guidelines
In addition to your income, a lender will look at your minimum monthly debts to caculate your debt ratios. The debt ratios’s is what determine “how much” loan you can afford.
FOLLOWING ARE THE TWO TYPES OF DEBT RATIOS’S THAT LENDERS WILL USE:
~ Front-End-Ratio – this is your gross income divided by the new PITI mortgage payment. This standard guidline is 29%
~ Back-End-Ratio – this is your gross income divided by the new PITI mortgage payment and also your minimum monthly payments from your liabilities. The standard guideline is 41%.
FOLLOWING IS THE TYPICAL DEBTS USED TO DETERMINE YOUR QUALIFYING RATIOS’S:
For Front-End-Ratios’s it would be:
~ your current and or future house payment
Back-End-Ratios – The minimum required monthly payments on all of the following:
~Auto loans – (except if there is less than 9 months left to pay)
~Student loans – (except if there is less than 9 months left to pay)
~Personal loans – (except there is less than 9 months left to pay)
~Charge cards – minimum required payments only.
~Child support – (except if there is less than 9 months left to pay
~Alimony – (except there is less than 9 months left to pay
~Federal Tax Lien Repayment Schedules – (if less than 9 months not caculated)
FOLLOWING ARE MONTHLY LIABILITIES THAT ARE NOT USED TO CACULATE DEBT RATIOS’S:
~Utility Bills
~Car & health insurance
~ Cell phone bills
The percentage of debts to income is called the debt-to-income (a.k.a. : back-end) ratios. A good goal is to spend no more than 38% of your income on all debts, including house payment. However, under FHA home loan guidelines you’re allowed to spend up to 41% of your monthly income on housing and other debts — if the rst of your application shows you can handle it.
Fannie Mae continues tightening the screws..!!!
Effective August 1, 2008, Fannie Mae issued some new rules affecting the conversion of a principal residence to a second home or investment property.
For a second home, both mortgages will be used to qualify for the new transaction (as occurs today.) The difference is that the borrower must prove 30% equity in the existing property or be required to escrow 6 months of principal, interest, taxes and insurance (PITI) for BOTH properties. With 30% equity, the lender may allow 2 months escrow on both properties.
On investment properties, Fannie now will require 30% equity on the existing property for the investor to claim up to 75% of the rental income as an offset to the mortgage payment in qualifying for a loan. Without the 30% equity, the rental income cannot be used as an offset AND the current and proposed mortgage payments must be used to qualify for the new loan. In addition, 6 months PITI for both properties must be escrowed.
With declining home values in most markets, these changes will make many homeowners ineligible for mortgage loans, when they want to retain ownership of the existing property.
Finally, as additional restrictions / requirements are placed on borrowers by Fannie, Freddie or the mortgage insurance companies, it becomes incumbent on real estate professionals to ask the pertinent questions of their client at the beginning of your relationship. Pre-approving your client is more critical than ever.
Top 10 Things To Know If you’re Interested In a Reverse Mortgage.
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA’s HECM provides these benefits.
2. Can I qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan.
3. Can I apply if I didn’t buy my present house with FHA mortgage insurance?
Yes. It doesn’t matter if you didn’t buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured.
4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What’s the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income.
6. Can the lender take my home away if I outlive the loan?
No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.
7. Will I still have an estate that I can leave to my heirs?
When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.
8. How much money can I get from my home?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less.
9. Should I use an estate planning service to find a reverse mortgage?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HUD-approved housing counseling agencies are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
10. How do I receive my payments?
You have five options:
- Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term – equal monthly payments for a fixed period of months selected.
- Line of Credit – unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
- Modified Tenure – combination of line of credit with monthly payments for as long as you remain in the home.
- Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower
Here at RatesAreHot.Com We “Pre-Qualify” you for a mortgage…So what does “Pre-qualify” mean you ask?
The term “Pre-qualify” is a term of art in retail finance. It means that a professional loan officer has taken some information from the consumer and has made a tentative decision but not verified any of it. With a Pre-quailfication, RatesAreHot.com does not ask the borrower for their social security number or any other identifiers, so for us its not possible to check credit. However it does mean to that the consumer provides some personal information such as their employment history, income and asset information.In addition the consumer is asked about their credit worthiness. When all of our questions are answered RatesAreHot.com provides a Pre-qualified amount to the consumer. Please remember that when you submit your information to a professional loan officer at a bank or mortgage company they will ask your for your social security number in order to obtain your credit scores.
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