2016 Tax Deductions for Homeowners

Purchased or refinanced a home in 2016? Find out the tax benefits available to you as a homeowner.

For most people, the annual task of completing income taxes is about as exciting as a visit to the dentist’s office. BUT…homeownership typically means increased tax deductions, which are generally considered to be a good thing.

Use the information below as a reference to help you determine which items from last year’s closing may be written off on your 2016 income taxes.


Write Off Items for 2016 Taxes

The list below pertains to primary or vacation residences (for investment properties, please see IRS Publication 527). All the items listed below can be found on the Closing Disclosure signed at settlement. This may help you save money in 2017!

Points Paid on a Home Purchase in 2016 – Closing Disclosure Page 2, Section A

If any origination charges include points paid in exchange for a lower interest rate, they may be fully deductible. **Other fees in this section – application, underwriting, processing, etc.- may not be deductible.

Points Paid on a Mortgage Refinance in 2016 – Closing Disclosure Page 2, Section A

Points paid to your mortgage company in exchange for a lower interest rate may be deductible, BUT there is a distinction between could be deductible this year, and what is deductible over the life of the loan:

  • Points paid on the portion of the mortgage proceeds that were used for home improvements may be deducted this year.
  • Points paid on a rate term refinance or any portion of the mortgage not used for home improvements must be spread out over the life of the loan. **As outlined above, other fees itemized in this section may not be tax deductible.

Property Taxes (actual and pro-rated) – Closing Disclosure Page 2, Section F

Property taxes itemized in this section may be tax deductible in the year they are paid. However, property tax escrows in section G may NOT be tax deductible until they are actually paid by your mortgage company to the appropriate municipality, (city or county).

Pre-paid Interest – Closing Disclosure Page 2, Section F

Pre-paid interest is typically collected at closing to square the borrower(s) away through the end of the month. Because this is a pro –rated part of the payment to begin the amortization cycle in arrears, the interest noted in this section may also be deductible.

Upfront Mortgage Insurance & VA Funding Fee – Closing Disclosure Page 2, Section B

If your adjusted gross income is $109,000 or less, you may be able to deduct upfront mortgage insurance on FHA and conventional loans as well as the VA Funding Fee.

This list does not include all of the property taxes paid throughout the year or all of the mortgage interest that will be included in the 1098 form(s) that will be sent by your mortgage servicer(s).


**PLEASE NOTE: THIS OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISER FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.

9 Ways to Avoid Mortgage Sabotage

Homebuyers are often not aware of how an innocent transaction such as making a credit card purchase or moving cash from one bank to another can jeopardize the mortgage pre-qualification process. Please be aware of the common areas that need special attention:

  1. Review your credit report:
    The best way to get a jump start on your mortgage process is to know what your creditors are saying about you and the accuracy of the information! Review the report with your Loan Officer and report any inaccurate or omitted information.
  2. Credit cards/new debt:
    Do not apply for any new credit of any kind! That creditor will show up on your credit report, and the lender will have to verify there is no new outstanding debt. If you are planning to add a debt or pay debts off for closing, wait until you have spoken with your Loan Officer. A paid debt may not show on your credit report, and the lender will have to re-verify each creditor’s current balance, which takes time. It may be possible to pay off those debts at closing, with no effect to your approval process.
  3. Don’t move cashing/savings around:
    Lenders have to verify all funds for closing, including the source of those funds. Moving assets around can create a paper trail nightmare. The best advice is to leave everything where it is, even if the purpose of the move is to pool your funds for buying the house. After your accounts have been verified and the lender give you an “ok”, you can consolidate your accounts if needed.
  4. Large deposits:
    All sources of funds for the transaction must be verified. The lender will be looking at any large deposits into your asset accounts (checking, savings, money market, etc.). You should be prepared to document the source-such as a copy of the paycheck, bonus check, money from the sale of an asset, etc.
  5. Do not pack financial papers:
    Keep all pages of your tax returns, along with any W-2’s, 1099’s, or K-1’s and any other financial papers from the past two years in a handy place. If you sold a home in the past two years, have your (HUD-1) Settlement Sheet handy. You may have to provide more items, which your Loan Officer will outline.
  6. Become a paper hound:
    Save all pages of all bank statements and pay stubs from now until closing. The lender will need these, so please make sure you keep them handy!
  7. Changing jobs: 
    While a different career opportunity can be an exciting venture, it’s best to wait until the mortgage process is complete if possible. A new position could derail the financial information you originally provided and jeopardize loan approval. If you need to change jobs, make sure you let your Loan Officer know so adjustments can be made.
  8. Gifts:
    Gifts from relatives are very common in the purchase of a home. However, there are specific ways a gift must be handled to avoid a paper trail nightmare. If you are receiving a gift, hold off on accepting the funds until you have spoken with your Loan Officer. There is a Gift Letter form you may use which provides instructions.
  9. Selling something?
    If you are selling an asset such as a car, an antique, or baseball card collection to come up with the cash for closing, make sure you document the asset. For example, if you purchase a car, obtain the check from the buyer, car title and a bill of sale. You may need to get a certified appraisal for the item.

When in doubt, always consult your Loan Officer. He or she will help guide you through the process and answer any questions you might have along the way.

Which mortgage is right for you?

As a home buyer, you may have more options than you realize to finance your investment. Figuring out which loan suits your needs requires research. Your Loan Officer will assess your situation and walk you through all of your choices. However, it never hurts to have a head start by knowing the basic categories of home loans.

Fixed Rate or Adjustable Rate Mortgage

A main deciding point during the loan process is the type of interest rate you prefer. You can have a fixed or adjustable interest rate. Here are the highlights of each loan type to help you decide.

Fixed-Rate: this mortgage is considered the “standard” choice for most borrowers. It allows you to pay off your home loan in a set amount of years (usually a term of 10, 15, 20 or 30) with the same interest rate. Although overall housing market rates may go up or down, your specific rate will be unchanged. Usually, a shorter term comes with a lower interest rate. For example, a 10 year fixed will have a lower rate than a 30 year fixed. This is an attractive choice for those looking for stability. You will know, for the most part, what your monthly mortgage payment will be. If rates start to drop significantly, you could have the option to refinance.

Adjustable-Rate (ARMs): while a fixed-rate stays true to its name, so does an adjustable-rate mortgage. ARMs offer a lower initial interest rate, but it might fluctuate after a certain period of time. A hybrid ARM is represented by fractions, such as 5/1, indicating the rate will adjust after 5 years, then continue to reset each year. Since the initial lower rates are appealing, ARMs are best for borrowers who don’t plan on staying in their home for long.

Conventional or Government-Backed Loan

The next step in selecting your mortgage is whether you quality for a conventional or government-backed loan. The main difference between the two is the institution which insures your loan.

Conventional mortgages are insured by private companies, while government-backed loans are subsidized by the government. FHA, VA, and USDA loans are all government-backed loans and available to eligible borrowers. This means there are certain guidelines home buyers must meet in order to receive funds. These loans usually help those with limited savings for a down payment, served in the military, or are looking to buy in a rural area. Your Loan Officer is well versed on these guidelines and can determine whether you qualify for a government-backed loan.

Conforming or Jumbo Loan

One of the final choices you can face as a borrower is deciding between a conforming or jumbo loan. These loan types concern the location and price of the home you are shopping for.

Conforming loans follow Fannie Mae and Freddie Mac’s conforming guidelines, which include maximum loan amount – how much you can borrow to purchase your home. These loan limits differ depending on where you are located and can change from year to year. In some counties the loan limit for a single unit is $417,000, while in others it can be upwards of $625,500.

Jumbo loans allow higher loan amounts not allowed by standard confirming programs (Fannie and Freddie). These loans are also known as “non-conforming” mortgages. If you are in the market for a  home that is priced higher than your county loan limit, you might want to ask your Loan Officer about a Jumbo loan. The requirements to qualify for this type of loan are different than a conforming loan, so it’s important to discuss whether it is fitting for your situation and home buying goals.

Review the highlights of the different loan types here, and become familiar with mortgage terms as you start the loan process. Your Loan Officer is available for any questions you may have.

Why It’s Important to Pre-Qualify for a Loan

Growing up, most of us heard the words “be prepared”. Although it sounds ominous, this advice is applied to most aspects of life, including home buying. In order for the loan process to run smoothly, one of the smartest things to do is get pre-qualified for a mortgage. A pre-qualification is an estimate of how much you can borrow from a lender and it allows you to explore loan options specific to your financial situation. Pre-qualifying for a loan before you go home shopping helps you set a budget and strengthen your negotiating position when making an offer.

How to pre-qualify

Pre-qualification is a simple process which can be done at zero cost and completed online or in person. Contact your Loan Officer to find out which documents you should prepare and to complete the pre-qualification form. Once you pre-qualify successfully, you can request a letter stating how much you may be able to borrow based on the information you provided. You can share this with your real estate agent or simply tell the agent a price range based on the outcome of your pre-qualification.

Pre-qualification vs. conditional approval

A conditional approval requires more information and is a much more serious level of approval. Conditional approval means you will have a commitment to a specific loan program at a specific loan amount. It will also provide more information about your interest rate and monthly mortgage payment.

Before you start your journey as a home buyer, the best place to start is by contacting your Loan Officer and getting pre-qualified

How Credit Scores Affect Mortgage Rates

Obtaining a low mortgage interest rate can help you save money on the price of your home. While many people try to compare lenders to secure the best possible rate, one of the main determinants of a mortgage rate is your credit score. Borrowers with higher scores are more likely to receive a lower rate than those with lower credit scores. Most lenders view a potential home buyer with a high credit score as more dependable and less likely to default on mortgage payments.

What is considered a “high” score?

The highest score a person can have is 850. However, it’s unusual for someone to have a perfect credit score. Most home buyers should aim for a score of 720 and above to qualify for good mortgage rate. If your credit score goes below 620 it can be difficult, though possible, to get a mortgage as well as a favorable rate. For an approximate breakdown, here is a range of how credit scores are judged:

Excellent = 720 and above
Good = 660 –719
Fair = 620 – 659
Poor = 619 and below

Can I still obtain a loan with a low credit score?

If you know your credit score isn’t stellar, it doesn’t necessarily mean you cannot qualify for a mortgage. For example, an FHA loan is a popular loan type among first-time homebuyers which accepts less than excellent credit scores. When you begin the mortgage process, your Loan Officer will order a credit report and you can start to explore your options in more detail.

Finding your credit score

A credit report can come from three different reporting bureaus: Equifax, Experian, and TransUnion. These reports require some background information and security questions, then deliver an outline of your credit history. However, if you’re interested in simply retrieving the number, you can easily view your FICO credit score, through your credit card company or online. It’s important check your credit score in order to determine whether you should improve it before applying for a loan. Speak with your Loan Officer about when you’re looking to buy and what you can do to in the meantime to increase your credit score.

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