With significant changes to the tax code taking effect this
year, homeowners and prospective buyers are revising their plans to take
advantage of its sweeping changes. Here’s an analysis based on information from
the National Association of Realtors and NerdWalllet.
Tax Rate Reductions. Joint filers with incomes of $77,400 to
$400,000, which will include most first-time buyers, will see their tax rates
decline from two to four percent when they file their 2018 taxes next year.
Mortgage Interest Rate. Changes in the mortgage interest
rate—lowering the cap to mortgages worth o $750,000 from 1 million and
excluding interest paid on home equity loans— would affect only the wealthiest
first-time buyers directly. The changes will make second homes and equity loans
more expensive for first-time buyers in the future.
State and Local Taxes. The new law limits the amount of
property taxes and other state and local taxes to $10,000 a year. First-time
owners, as well as current owners, will lose the ability to deduct thousands of
dollars that they can deduct in 2018, increasing the cost of homeownership,
especially in high tax states like New York and California. In the State of
Missouri most First Time Home Buyers homes will not have an annual property tax
anyway near $10,000.
Student Loan Interest Deduction. Potential first-time buyers
and their parents who have been burdened with student loan debt will lose the
ability to deduct the interest they pay on their loans. As a result, it will
cost them more to pay off their debts to reach a DTI that would qualify them
for a mortgage.
Personal Exemptions. Personal exemptions for filers and
their dependents, worth $4,150 each in 2017, was eliminated in the new tax law.
Moving Expenses. Taxpayers have been able to deduct some
moving expenses related to their employment, but this deduction is eliminated
in the new act.
Standard Deduction. Taxpayers must decide whether to take
the standard deduction or itemize their deductions. In the past, most
homeowners have itemized to take advantage of the mortgage interest deduction
and the deduction for state taxes, including property taxes. The new law
doubles the size of the standard deduction from $6,000 to $12,000, or $24,000
on a joint return. According to Zillow’s Alexander Casey, under the current
setup, roughly 44 percent of U.S. homes are worth enough for it to make sense
for a homeowner to itemize their deductions and take advantage of the mortgage
interest deduction. Under the new law, that proportion of homes drops to 14.4
Impact on First-time Buyers: NAR’s research department
modeled examples of homeowners as different income levels, mortgage sizes, and
A single first-time buyer who purchases a home costing
$205,000 and takes out a 30-year fixed rate mortgage at 4% interest. She puts
down 3.5 percent. Assuming she buys early in 2018, her first-year mortgage
interest would total $7,856, and she would pay real property taxes of $2,050.
Under the old law, her taxes for 2018 would fall by $2,098; Under the new law,
her taxes would rise by $30. Moreover, the difference between renting and
owning was $2,098 under the prior law but shrinks to $637 ($6,060 - $5,423), or
$53 per month.
A family of five with an income of $120,000 that buys a
$425,000 home with a 10 percent down payment on a 30-year fixed mortgage at a 4
percent. Under the old law, they would save $3,219 by buying. Under the new law
their taxes would decline only $100, but if they had remained renters, they
would receive a tax cut of almost $2,400. Under the prior law, the tax benefit
of buying a home was $3,219. Under the new law, they will get a tax cut $948
($8,999 - $8,051), a much weaker incentive to buy.
The VA mortgage program does not have a required minimum down payment, it is a 100% mortgage. But, there are closing costs involved in the VA mortgage as there is in all mortgage. WHO pays for closing costs is much different with the VA mortgage than it is with any other mortgage program, another benefit to the veteran borrower.
A common way to remember
which costs a veteran is allowed to pay for is to remember the acronym ACTORS.
That stands for:
are common charges found on most every VA mortgage and while they can vary a
bit by amount; these fees are the ones that can be paid for by the veteran. But
what about these charges?
fees, and others, are example of charges that the veteran is not allowed to
pay. Even though the VA lender requires a processing and an underwriting fee in
order to approve the VA loan, the veteran may not pay for these charges and any
other fee deemed "non-allowable." So if the veteran can't pay them,
closing costs can be paid by the seller of the property and is typically the
initial method of dealing with such charges. As part of a sales contract, the
buyer can say, "We'll pay you $200,000 for this home as long as you pay
for $3,000 in closing costs."
for a buyer's closing costs is considered a seller concession, and is limited
to four percent of the sales price of the home. If a home sells for $200,000,
then the seller can only pay $8,000 of the buyer's costs.
concessions can be used to pay for the buyer's VA funding fee, loan costs,
property taxes and insurance among others.
real estate agent representing the buyer can contribute toward closing costs in
the form of a credit at the closing table. Real estate agent commissions are paid
for by the seller of the property and typically represented as a percentage of
the sales price.
a real estate agent brings a buyer to a seller and there are two agents, the
listing agent and the selling agent, the commission is typically split between
both agents. If the sales commission is six percent, each agent gets three
percent each for their services. Some states don't allow the practice of an
agent contributing toward a buyer's closing costs so check to see if it's okay
in your area.
lender can offset part or all closing costs with a lender credit. Lenders can
offer a credit to a borrower by adjusting the borrower's interest rate. It's
like paying a point to get a lower interest rate but in reverse.
example, a VA borrower applies for a 30 year fixed rate VA mortgage and is
offered a 3.75 percent rate. The lender offers the buyer a lower rate if the
buyer pays one point, or one percent of the loan amount. The choice is 3.75
with no points or 3.50 with one point.
the other direction, the lender can offer 3.75 percent with no points and 4.00
percent with one point credit to the borrower. On a $200,000 loan, the lender
can increase an interest rate by about one-quarter of one percent and the
borrower gets a $2,000 credit toward closing fees.
seller can pay, an agent can pay, the lender can pay but the borrower also has
one more way to pay non-allowable closing costs. Recall that an origination fee
is an allowable charge.
lieu of charging the borrower non-allowed fees, the lender can charge a one
percent origination fee instead of itemized non-allowable charges for things
such as attorney or underwriting charges.
costs on VA loans are indeed a different breed compared to FHA or conventional
loans, especially with regard to who is responsible for any particular fee. If
there are any questions about who pays for what, those questions should be
asked directly to your loan officer. VA costs can be confusing, there's no need
for them to be.
If you have questions go to www.bobrutledge.com and learn more or call Bob Rutledge with USA Mortgage directly at 314-628-2218.