Additional Tax Benefit Information for Home Buyer

April 15 is a date dreaded by some. As what Anthony Hopkins said in the movie Meet Joe Black, the only things you can't avoid in life are "death and taxes". BUT, you can avoid paying for high income taxes.

Filing and paying for taxes should not be dreaded - especially for homeowners because they are entitled to many valuable tax deductions.  All the deductions in the world won't do you any good unless you know how to take advantage of them. You do not want to pay taxes you don't need to pay.  

Here are some information you need to know to maximize your deductions and avoid common tax deduction mistakes. You do not want to pay taxes you don't need to pay.

1. Mortgage Interest Deduction 

Mortgage interest are paid during the first few years of the mortgage term.  Through the home mortgage interest deduction, homeowners are allowed to reduce their taxable income by deducting the amount of interest paid on the loan which is secured by their principal residence.  On a mortgage of up to $1 million, they can deduct the interest they've paid at settlement if they itemize their deductions on Form 1040.  

2. Property Taxes 

Property tax paid to the local municipality are deductible. The new home owner do not need to pay income tax on money that was spent on property taxes.  However, money held in escrow for the purpose of paying property taxes are not deductible - until the money is actually taken out of escrow and paid the property tax.

3. Selling Costs

Selling costs on the sale of your home can be claimed as tax deductions.  Closing fees, repairs, capital improvements costs, broker's fees and advertising/marketing expenses required to sell their home will be deducted on the gain on sale of their home.  Provided that the repairs were made within 90 days of the sale.  Maintenance items such as painting the home and changing the carpet are usually not considered as capital improvement.

4. Mortgage Insurance Premiums Deduction

Homeowners that paid less than 20% down payment on their homes are required to pay Mortgage Insurance Premiums or MIP to protect the lender in case the borrowers default on the loan.  MIP payers can deduct those insurance payments as tax deduction when they file their returns. 

5. Energy Efficient Upgrade/Repair Deduction

The cost of the building materials used for energy efficient upgrades can be deducted on the total tax payable, not just a reduction in the taxable income.

6. Home Office Deduction 

Homeowners can deduct a percentage of their mortgage, utilities and repair bills dedicated their office space. However, the home office must be the primary office location of the business or it is used as storage area for your business (i.e. samples, inventory, etc)

7. Construction Loan Interest Deduction

If a home owner has borrowed money to build a home, he/she may qualify to deduct the interest.  The interest deduction will only be applicable for the first 24 months of the loan even if the actual construction takes longer.

8. Home Improvement Loan Interest Deduction

There's also tax deduction on the interest on the loans used for home improvements. Home improvements like adding square footage, upgrading or repairing damage from a natural disaster are tax deductible. Painting a home or changing the carpet are not included in the capital improvement projects. 

9. Profit on Sale of Real Estate Deduction 

A homeowner can claim up to $250,000 of profit (for single individual) and $500,000 (for married couples) from the sale of the real estate property. Provided that the it is the primary residence of the homeowner/s and they have lived in it for two of the past 5 years. 

This article can serve as a guide for filing your income taxes.  If you have further questions, please contact our office and we can refer you to Tax Professionals to assist in your inquiries. 

Why Mortgage Rates Are Not Increasing

Most experts predicted that mortgage rates will rise in 2014.  However for the past month, rates have not really moved.  If anything, they've moved slightly lower. What happened? Was the prediction inaccurate?  

Guy Cecala, Inside Mortgage Finance editor-in-chief said, "The simple answer is that the rate hike due to the Fed's tapering really took effect last May/June - despite the fact that the tapering didn't begin until December."  The mortgage rate jump up at the start of last summer. 

Based from Mortgage Bankers Association weekly report, total number of mortgage applications are down 52% from a year ago, while refinance applications and purchase applications are down nearly 63% and over 12% respectively. 

Federal Reserves has cut its mortgage-bond purchases by $5 billion in January but it has had no effect on rates for one simple reason - according to the publisher of TheMortgageReports.com, the reason why Fed's tapering had no effect on rates is because investors are filling the void. When stock market falls, investors put their money elsewhere such as bonds. When the Feds are cutting its purchase of bonds, other investors have stepped in to fill the void. 

So, is the prediction going to come true this 2014? Experts say, probably yes, but not because of Fed's moves or more mortgage regulation. As a general rule, mortgage rates tend to increase with an improving economy and a strong stock market - and that it is beginning to look like where we are headed!!  If you, or anyone you know, is interested in buying, selling, or learning more about real estate please contact us.  We specialize in Alaska Real Estate and also have amazing Realtors we refer in other housing markets Nationwide!! Call us today and we would happy to help!!  

TOP 5 HOME IMPROVEMENTS WITH HIGHEST ROI

Are you planning on doing any home improvement before you sell your home?  Do you know which home upgrades will attract the buyers? The Cost vs Value Report 2014, will show you how much you can recover from the cost that you are going to invest in your home improvement project once you sell your home. The report is a result of an online survey, between August and October 2013, from appraisers, agents and brokers that provided their expert opinions and estimates.  Cost vs Value Report 2014 can be downloaded for free at www.costvsvalue.com.

Adding a garage and a deck pays off, according to this year's Cost vs Value Report.  Real estate professionals ranked garage addition as the most important factor for buyers providing sellers with the highest  return on investment in the midrange category. It has a return on investment percentage of 104.3%  with an estimated job cost of $55,120 and having a resale value of $57,500.  While in the upscale category, deck addition is the most important home improvement for the buyers.  ROI percentage is at 83.3%. The estimated cost is $38,993 at $32,500 resale value.  Here are the top 5 home improvements based from the survey of Cost vs Value Report 2014:

MIDRANGE CATEGORY	JOB COST	RESALE VALUE	COST RECOUPED	RANK
Garage Addition	$55,120	$57,500	104.3%	1st
Attic Bedroom Remodel	57,822	60,000	103.8%	2nd
Family Room Addition	95,377	90,000	94.4%	3rd
Basement Remodel	75,406	70,000	92.8%	4th
Window Replacement (vinyl)	10,993	10,000	91%	5th

UPSCALE CATEGORY	JOB COST	RESALE VALUE	COST RECOUPED	RANK
Deck Addition (composite)	$38,993	$32,500	83.3%	1st
Bathroom Remodel	55,870	40,000	71.6%	2nd
Window Replacement (vinyl)	14,028	10,000	71.3%	3rd
Window Replacement (wood)	17,747	10,000	56.3%	4th
Bathroom Addition	80,924	42,500	52.5%	5th

If you've already decided to upgrade your home, here's  the TOP 5 Project Descriptions guideline from Cost vs Value Report that you can refer to:

MIDRANGE CATEGORY

GARAGE ADDITION

Construct a 26-by-26-foot freestanding two-car garage, including footings and slabon-grade foundation, 2x4 wood frame with OSB structural sheathing, and gable truss roof at 6/12 pitch. Install 25-year asphalt shingle roofing with galvanized metal flashing; vinyl siding and trim. Install five double-hung 30-by-48-inch vinyl windows; one 3-0/6-8 exterior door with half-glass

and lockset; and two composite 9-by-8-foot overhead doors with motorized openers. Include 100-amp breaker at main house panel and 50 linear feet of trench buried conduit to feed new electrical subpanel.  Provide electrical wiring for openers; three-way switching for fluorescent ceiling fixtures over each bay; three-way switching for two exterior spotlights; outlets to code. Interior wall, floors, and ceilings remain unfinished.

ATTIC BEDROOM ADDITION

Convert unfinished attic space to a 15-by-15-foot bedroom and a 5-by-7-foot bathroom with shower. Include a 15-foot shed dormer, four new windows, and closet space under the eaves. Insulate and finish ceiling and walls. Carpet floor. Extend existing HVAC to new space; provide electrical wiring and lighting to code. Retain existing stairs, but add rail and baluster around stairwell.

FAMILY ROOM ADDITION

In a style appropriate to the existing house, add a 16-by-25-foot room on a crawlspace foundation with vinyl siding and fiberglass shingle roof. Include drywall interior with fiberglass insulation, pre-finished hardwood floor, and 180 square feet of glazing including windows, atrium-style exterior doors, and two operable skylights. Tie into existing HVAC. Add electrical system to code, including 12 recessed ceiling lights. 

WINDOW REPLACEMENT (VINYL)

Replace 10 existing 3-by-5-foot double-hung windows with insulated vinyl replacement windows. Wrap existing exterior trim as required to match. Do not disturb existing interior trim.

WINDOW REPLACEMENT (WOOD)

Replace 10 existing 3-by-5-foot double-hung windows with insulated wood replacement windows, exterior clad in vinyl or aluminum. Wrap existing exterior trim as required to match. Do not disturb existing interior trim.

UPSCALE CATEGORY 

DECK ADDITION (COMPOSITE)

Add a 16-by-20-foot deck using pressure treated joists supported by 4x4 posts anchored to concrete piers. At one corner, add a second, 10-foot-diameter six-sided platform one step down from the main deck.  Include stairs on the smaller deck, assuming three steps to grade. Install composite deck material in a simple linear pattern. Trim the perimeter joists and wrap the 4x4 posts with composite materials to match the decking. Using the same decking material, include a built-in bench and planter along one 16-foot side. On the remaining perimeter, provide a railing system using composite material of contrasting or complementary colors that includes decorative balusters, post caps, and lighting. Railing and trim should provide for overall curb appeal to the outdoor living space by integrating the deck with the home’s color and architecture, creating a custom look.

BATHROOM REMODEL

Expand an existing 35-square-foot bathroom to 100 square feet within existing house footprint. Relocate all fixtures. Include 42-by-42-inch neo-angle shower with ceramic tile  walls with accent strip, recessed shower caddy, body-spray fixtures, and frameless glass enclosure. Include a customized whirlpool tub; stone countertop with two sinks; two mirrored medicine cabinets with lighting; a compartmentalized commode area with one-piece toilet; and a humidistat-controlled exhaust fan. Use all color fixtures. Use larger matching ceramic tiles on the floor, laid on the diagonal with ceramic tile base molding. Add general and spot lighting including waterproof shower fixture.  Cabinetry shall include a custom drawer base and wall cabinets for a built-in look. Extend HVAC system, and include electric in-floor heating and heated towel bars.

WINDOW REPLACEMENT (VINYL)

Replace 10 existing 3-by-5-foot double-hung windows with insulated, low-E, simulated divided-lite vinyl windows. Simulated wood grain interior finish; custom-color exterior finish. Trim exterior to match existing; do not disturb existing interior trim.

WINDOW REPLACEMENT (WOOD)

Replace 10 existing 3-by-5-foot double-hung windows with insulated, low-E, simulated divided-lite wood windows. Interior finish of stained hardwood; exterior finish of custom color aluminum cladding. Trim exterior to match existing; do not disturb existing interior trim.

BATHROOM ADDITION

Add a new 100-square-foot master bathroom to existing master bedroom over a crawlspace. Include 42-by-42-inch neo-angle shower with ceramic tile walls with accent strip, recessed shower caddy, body-spray fixtures, and frameless glass enclosure. Include a customized whirlpool tub; stone countertop with two sinks; two mirrored medicine cabinets with lighting; a compartmentalized commode area with one-piece toilet; and a humidistat-controlled exhaust fan. Use all color fixtures. Use larger matching ceramic tiles on the floor, laid on the diagonal with ceramic tile base molding. Add general and spot lighting including waterproof shower fixture. Cabinetry shall include a custom drawer base and wall cabinets for a built-in look. Extend HVAC system, and include electric in-floor heating and heated towel bars.

More on Project Descriptions on Cost vs Value Report 2014.

There are a lot of factors to consider when deciding on which home improvement to work on, for example, cost and time.  It is important to know what features are important to the buyers in your area.  The Cost vs Value Report 2014 can be a big help when making your decisions. It gives you a realistic budget and gives you outlines what the true cost of completing a remodeling project is.  It also gives you an idea of the resale value of your decided home improvement. 

If you are planning to make any home improvement, I'll be happy to introduce you to some local experts. 

SOCIAL MEDIA - YOUR CREDIT SCORE SUBSTITUTE

Do you know that lenders refer to social media to find out if you are a good investment or not?  This  new trend of credit investigation is also called "alternative data".

If you have a steady income and a good credit score then you have nothing to worry about.  But if you are young and haven't build up your credit score yet, then watch out for the "facebook score."

Social media technology is not only used for networking but it also determines what type of a person you are.  Employers sometimes refer to facebook to see if candidates have good moral background.  It is also now being used to determine if you're the type to pay back loans or the kind who defaults.

Linkedin profiles give a lot of information to the reader.  It validates your stated employment is real or not based from the people you are linked with. 

Your posts and tweets could also establish your credit worthiness.  "Alternative data" is still on its infancy stage, but it's getting more and more popular. Lenders are working with companies who create predictive modelling and algorithms.  They use the data associated with your ties to friends, business associations and community to understand whether you are a credit risk or not. (Source: www.realtytimes.com)

Consumer Financial Protection Bureau or CFPB IS monitoring how lenders will use social media as a source of information for their credit decisions without the violating individual's privacy rights.  If I were you, be careful on your postings, someone might be watching your every move without you knowing it.

If you need more information on how to improve your credit score, please don't hesitate to contact me. I am at your service.  More information on www.jamesteamrealestate.com

HUD's DEFINITION OF QUALIFIED MORTGAGE RULE

Department of Housing and Urban Development or HUD released its version of the Qualified Mortgage rule.   Effective January 10, 2014, the new rule will apply to the new mortgages applied on or after the said date. HUD oversees FHA (Federal Housing Administration) which caters to the low income and first time home buyers and has a 3.5% minimum down payment requirement.  

The Dodd–Frank Wall Street Reform and Consumer Protection Act requires HUD to propose a QM definition that is aligned with the Ability-to-Repay criteria set out in the Truth-in-Lending Act (TILA) as well as the Department’s historic mission to promote affordable mortgage financing options for underserved borrowers. HUD’s rule builds off of the existing QM rule finalized by the Consumer Financial Protection Bureau (CFPB) earlier this year. (Source:www.hud.gov)

To qualify under the new HUD'S Qualified Mortgage definition, mortgage loans must: (Source: www.hud.gov)

- Require periodic payments without risky features

- Have terms not to exceed 30 years

- Limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Title I, Title II Manufactured Housing Section 184,Section 184A loans and other)

- Be insured or guaranteed by FHA or HUD.

There are 2 types of Qualified Mortgages under the new rule:

1. Rebuttable Presumption Qualified Mortgage - are loans with an Annual Percentage Rate (APR) greater than the Average Prime Offer Rate (APOR) + 1.15 percentage points and ongoing mortgage insurance premiums. 

2. Safe Harbor Qualified Mortgages - loans with APRs equal to or less than APOR + 1.15 percentage points

+ on-going Mortgage Insurance Premiums (MIP)

In addition, the HUD's rule covers Title II manufactured housing, Title I manufactured housing and property improvement loans, Section 184 Indian Home Loan Guarantee Program mortgages and Section 184A Native Hawaiian Housing Loan Guarantee Program mortgages. 

Unlike the Consumer Financial Protection Bureau's Qualified MOrtgage rule, HUD's final rule does not require borrowers to have 43% or less debt-to-income ratio. 

HUD also adopts CFPB's list of transactions that are exempted from the ability-to-repay requirements which incudes reverse mortgages, bridge loans with terms of a year or less and construction-to-permanent loans of a year or less for the construction phase.  

According to NAR (National Assocation of Realtors), the new rule will have a major impact on how lenders determine the underwriting standards to be used to qualify borrowers.  Most Realtors think that with the new Qualified Mortgage rules in effect, it will be more difficult to qualify for a new loan.  Especially for the first time home buyers.  Even though, there are only a few weeks left until the effectivity of the new Qualified Mortgage rules, there's still time to take advantage of the more relaxed credit standards. ACT NOW! Don't wait until it's too late! 

For more information on listings, please visit www.jamesteamrealestate.com.

Tax Could Increase in 2014

Mortgage Foreclosure Debt Forgiveness Act of 2007 - a tax break for struggling mortgage borrowers is set to expire in January 2014. This law was created to help distressed home owners and prevent them from defaulitng on their loan. Normally, debt forgiveness results in taxable income. But under the Mortgage Foreclosure Debt Forgiveness Act, the home owner can exclude up to $2M of debt forgiven on his/her principal residence. 

According to National Association of Realtors (NAR) a return of the tax could have a BIG IMPACT on underwater home owners. 

Once the law expires, a home owner who owns a $400,000 property and sells it for $250,000, the forgiven debt of $150,000 will be taxed after January 1 of 2014. The tax payable could reach up to $35,000. In addition to that, the debt that was forgiven from 2007 to 2013 must be included in the taxable income.  

NAR president Gary Thomas firmly believes that extending the Mortgage Foreclosure Debt Forgiveness Act is detrimental to the continuous recovery of the housing market. 

"If it's allowed to expire, many distressed homeowners may opt instead for continued default until foreclosure or simply to walk away from the property," said Thomas. "Either way, this would destabilize communities as foreclosed and vacant houses drive down values in the surrounding neighborhood." (Source: www.money.cnn.com)

There's a very slim chance that the government will extend the bill. With only approximately 2 weeks into the year and Christmas season at that.  Our best bet is if the government extends the bill by next year and apply it retroactively.

If you have any more questions, please feel free to contact me.

Getting a Mortgage is About to Get Harder

 

Starting January 10, 2014, the New Qualified Mortgage Rule (QM) will take effect to avoid the repeat of the housing and credit crisis happened 5 years ago. The new rule prohibits banks from approving mortgages to potential borrowers that have higher than 43% of debt-to-income ratio. It means that potential borrowers' total debt liability should not exceed 43% of income.

The new QM rule will make it more difficult for first time buyers to purchase their own home.  First time home buyers may have limited income or existing college loans.  This will result to 30 - 40% decrease in the total market. When this market is taken out of the equation,prices are going to be stagnant or decline. Stagnant or declining pricing means underwater home owners will stay in that position, encouraging short sales and foreclosures. 

Borrowers that do not meet the Ability-to-Repay (ATR) standard will likely see decrease in credit availability and increased in borrowing costs. In addition, borrowers with inconsistent income such as self-employed, contract workers, individuals with cyclical or seasonal employment, or those primarily reliant on investment income will likely have some difficulties satisfying the underwriting criteria despite good credit histories.  (Source: First Look - Implications of the ability to repay rule and the qualified mortgage definition)

Mortgage lenders are going to look sharply on (1) Current or reasonably expected income and assets, (2) Current employment (3) Monthly payments on covered transactions (4) Monthly payments on simultaneous loans (5) Monthly payments for mortgage related obligations (6) Current debt obligations alimony and child support (7) Monthly debt-to-income ratios or residual income and (8) Credit history.

Bottom line is... it will be harder for the potential home buyers to obtain a loan once the new rule takes effect due to the increased required documentation, higher down payments and stricter underwriting guidelines.  

As for the seller, if you want to sell quickly, that will not be happening for next year.  Currently, the average closing period is 45 days, it will definitely take longer once the new QM rule takes effect.

So, if you're shopping for a mortgage, it's a MUST that you close your loan before the end of the year.  It is important to ACT NOW! Not in a few weeks or a few months, but NOW!!! While lending policies are still manageable. Once the new rule takes effect it will be harder for both buyers and sellers to close transactions.

If you need to understand how and when the new regulations may impact you, don't hesitate to contact me. I can provide good tips and guidance to get through the mortgage process as smoothly as possible.