Lower Mortgage Rates Coax Home Buyers Off the Fence

 

Stabilization in borrowing costs is easing home shoppers’ affordability concerns.

Mortgage rates, which have settled in the 6% range, barely budged this week, giving potential home buyers more confidence to shop for real estate. The 30-year fixed-rate mortgage averaged 6.69%, marking the sixth consecutive week of holding steady, Freddie Mac reports.

“Given this stabilization in rates, potential home buyers with affordability concerns have jumped off the fence and back into the market,” says Sam Khater, Freddie Mac’s chief economist. “Despite persistent inventory challenges, we anticipate a busier spring homebuying season than 2023, with home prices continuing to increase at a steady pace.”

Buyers are already reemerging in the market. Mortgage applications to purchase a home—a gauge of future homebuying activity—are up nearly 8% compared to the week before, the Mortgage Bankers Association reports. “Conventional and FHA purchase applications drove most of the increase last week as some buyers moved to act early this season,” says Joel Kan, an economist at the MBA.

Sales of newly built homes also are on the rise, increasing 8% month over month and 4.4% year over year in December, the Commerce Department reported this week. The construction uptick coincided with drops in mortgage rates at the end of last year. Plus, the latest homebuilder surveys show rising optimism for future sales expectations in the new-home sector, says Alicia Huey, chairperson of the National Association of Home Builders.

“There is no question that 2023 was a rough year in housing, but there are plenty of reasons to see optimism in 2024,” says Jessica Lautz, deputy chief economist at the National Association of REALTORS®. “Lower mortgage interest rates will have buyers and sellers reconsider sitting on the sidelines.”

Freddie Mac reports the following national averages with mortgage rates for the week ending Jan. 25:

30-year fixed-rate mortgages: averaged 6.69%, increasing from last week’s 6.6% average. A year ago, 30-year rates averaged 6.13%.

15-year fixed-rate mortgages: averaged 5.96%, increasing from last week’s 5.76% average. Last year at this time, 15-year rates averaged 5.17%.

bY: Melissa Dittmann Tracey

Original Post

$250 million in down payment assistance up for grabs for some California home buyers

 

Between 1,700 and 2,000 lucky lottery winners will receive vouchers that they’ll then have 60 days to spend on a home as part of California's Dream for All program.

SACRAMENTO, Calif. — California will dole out $250 million more in down payment assistance to first-time homebuyers this spring, while making changes to its 1-year-old program aimed at reaching a more diverse group of borrowers across the state.

Last year frenzied homebuyers hoovered up nearly all $300 million budgeted for the California Dream for All loan program in just 11 days. While the new program was wildly popular, some realtors and lenders reported that clients who received the funds were already far along in the home purchase process, fueling speculation about whether the loans were going to people who already could afford to buy homes.

The program’s next round, launching today, keeps the same “shared appreciation” lending model: The state will give first-time homebuyers money towards a down payment — up to 20% of the purchase price or $150,000, whichever is lower — then it will get paid back the loan plus a share of the home’s appreciation whenever it sells again.

This time the California Housing Finance Agency, which administers Dream for All, hopes to head off a mad scramble for the loans by replacing its original first-come, first-serve model with a lottery. 

Homebuyers will have until April to find a state-approved lender and start working on an application. A lottery opens in early April, and buyers will have a month to submit their applications. Between 1,700 and 2,000 lucky lottery winners will receive vouchers that they’ll then have 60 days to spend on a home.

More time to prepare

The extra time to prepare should help Californians who may not be sure if they could buy a home without state assistance, said CalHFA spokesperson Eric Johnson. 

The program is for people for whom homeownership “may be a dream but they’ve got the steady income, they’ve got the decent credit score of above 660 and they’re thinking, ‘OK, wow, this could really make the difference,’ ” said Johnson. “This gives them time to get motivated, to find a loan officer. If they need to do a little work on their credit score or change their debt-to-income ratio, they’ve got time to work with one of our loan officers or brokers.”

The agency will set aside a number of vouchers for each region of the state based on its share of the state’s households. That’s to avoid the geographic disparities that emerged in the program’s first round, in which Sacramento County homebuyers disproportionately benefited but those in Los Angeles County, which represents 25% of the state’s population, received just 9% of loans. 

California Dream for All “was initially conceived of as focusing on higher-cost parts of the state where it’s especially hard to use existing down payment programs, and that was not exactly an unequivocal success,” said Adam Briones, CEO of California Community Builders, which advocates for closing the racial wealth gap through homeownership and helped draft the research that inspired the program.

The state’s red-hot housing market means some Californians who might otherwise be able to afford mortgage payments must struggle to save enough for a down payment. About 55% of Californians own their homes, the second-lowest home ownership rate of any state, behind New York.

Who will benefit?

Dream for All’s backers had hoped it would especially benefit members of communities that have experienced redlining or low homeownership rates, such as Black and Latino Californians. A CalMatters analysis of Dream for All’s first round found that its beneficiaries included a higher share of people of color than exists among California’s current homeowners, but they were still whiter than the state’s overall population.

California law prohibits state-sponsored affirmative action, which poses a challenge for officials trying to design a program that tackles historical redlining without explicitly addressing race, Briones said.

California Dream for All’s new rules include a requirement that at least one homebuyer in each transaction be a first-generation homebuyer, defined as someone who has never owned a home and whose parents also did not own a home, or someone who grew up in foster care. The state also has lowered the income eligibility threshold from 150% of the area median income to 120%, a number that ranges from about $95,000 a year in Fresno County to about $215,000 in Santa Clara County. 

The state plans an outreach campaign beginning in February that will focus especially on Southern California and the Central Coast to let potential homebuyers know about the program, Johnson said. It will include flyers in laundromats, text messages and advertisements on Spanish-language radio and in Black newspapers.

Colette Washington, a realtor in Oakland, said that about a quarter of her clients are first-time homebuyers and she tried to encourage them to apply for California Dream for All last year. But most were confused by the program and procrastinated, she said, and the money ran out before any of them successfully applied. 

Buying a house “is probably the biggest financial commitment most average folks will make in a lifetime and so it’s intimidating,” she said. “Fear is paralyzing.”

This time around, she said, “I personally would like to see the people who really need the money get it first.”

How to apply for Dream for All

So far California Dream for All has survived Gov. Newsom’s budget ax, which fell on some of the state’s other housing programs last week, as the governor proposed clawbacks of unspent funds to solve a budget deficit his office projects will reach $38 billion in 2024-25. 

Created in 2022, Dream for All was originally envisioned as a 10-year, $10 billion investment before lawmakers scaled it back last year.

Californians interested in applying for the program can visit the California Dream for All website for updates or join CalHFA’s homebuyer email list. 

Johnson had one other piece of advice for wannabe homeowners in the state: “Most importantly, don’t give up hope. There is a possibility of owning your own home in California.”

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Original Post

Mortgage Overlays Explained

 

What’s an Overlay? An Overlay is a mortgage industry term that highlights an additional qualifying requirement(s) beyond what the guidelines issued by Fannie Mae and Freddie Mac. FHA, VA and USDA loans can also have overlays. These guidelines are set forth for several reasons, but one is to provide lenders with mortgage program stability as well as allowing lenders to sell loans, either individually or ‘in bulk.

Think about that for a moment. If there were no secondary market at some point the mortgage company would run out of money to lend. When a lender makes a loan, it draws down some money from its credit line and replenishes that credit line once the loan(s) is sold. This process occurs over and over again. 

Overlays can also be used to target a specific type or class of borrower. To reduce risk, a lender might ask for a greater down payment than is originally required. Let’s look at credit scores as an example. While Fannie might ask for a minimum credit score to be 680 a lender might decide to up the ante a bit and set the minimum score at 700. 

Catering to different groups means catering to a particular market or class of borrower. One lender may continue to stand firm with a 680 score while another decides 700 is better. Many borrowers may not know about this dynamic. This can mean applying for a mortgage at a mortgage company, getting declined and thinking that all lenders are the same and stop their search for a new home. All they really needed to do was to continue shopping for a lender who would approve the very same loan, just without the harsher overlays.

If a lender asks for a 680 score your loan officer will know where to send a loan with a sub-700 FICO. These overlays can be placed on both conventional as well as government-backed mortgages. The government-backed mortgages are those underwritten to FHA, VA and USDA program guidelines. 

Overlays can come and go over time. A lender might set forth a new overlay and then a year later remove it or even enhance it. It’s completely up to the individual lender as long as the loan is approved using established guidelines. What lenders can’t do is weaken guidelines. There are no overlays to drop the minimum score requirement from 680 to 650, for example. Doing so would mean the mortgage didn’t meet program guidelines and the loan could no longer be sold. Overlays help protect the lender while at the same time providing borrowers with additional choices.

Finally, lenders can’t dilute loan program requirements. In other words, lenders can’t apply an overlay to lessen the requirements. Reducing approval requirements means the loan won’t have the minimum features that secondary markets require. If a lender does in fact reduce the requirements the loan can still be made, it’s just that the lender can expect to keep the loan in its own possession for the life of the loan.

WRITTEN BY DAVID REED

Original Post

Can You Get a Mortgage with Bad Credit?

The real estate market remains hot right now, despite economic headwinds. Many people want to jump in and buy a home or upgrade their current home to a new one for good reason. Interest rates are incredibly low, so now could still be a buying opportunity, despite limited inventory and high prices in some locations.

If your credit isn’t perfect, you may wonder if anyone will approve you for a mortgage. The short answer is maybe.

You aren’t alone if you don’t have great credit. Around 15% of Americans have a credit score from 500 to 599, which is considered poor. Around 10% of people have credit in the range of 600 to 649, which is considered fair.

When you’re applying for a mortgage, you’re most likely to be approved with a score of at least 650, although even anywhere in the 600s can make it challenging. If your score is below 500, you’re almost certainly not going to be approved for a mortgage, and beyond that, the following are key things to know.

Conventional Mortgages

Conventional mortgages tend to have the strictest requirements as far as your credit score. Freddie Mac and Fannie Mae are two companies offering conventional mortgages. Freddie Mac’s minimum credit score requirement is 660, with a down payment of 3%. Fannie Mae’s minimum score for a 3% down payment is 620. If you make a down payment of at least 25%, you may be eligible for a Freddie Mac conventional mortgage with a credit score as low as 620.

The majority of lenders follow similar requirements, because usually after your loan is closed, the lender will sell it to Freddie Mac or Fannie Mae.

You should be aware that in the eyes of your lender, there’s a difference between having a low score because you don’t have much credit history and having a low score because of bad credit history. You’re likely to be viewed more favorably with limited credit than with bad credit.

If you’re close to the lending cut-off, you should be able to show that you have a debt-to-income ratio of no more than 36%. You will probably also need to show that you have at least two months of cash reserves on hand.

What About an FHA Loan?

An FHA loan may be an option for someone with a very low credit score. You can be approved for these loans with a score as low as 500, but you’ll have to plan to put at least 10% down.

If you have a higher score, you may be able to put as little as 3.5% down.

Aside from VA loans, FHA loans have the least stringent approval guidelines.

As such, FHA loans are often used by people after a foreclosure or bankruptcy.

FHA lenders don’t have to follow the above credit score requirements. They can require that your credit score is higher for approval. Many FHA borrowers have a score somewhere between 650 and 699.

VA Loans

For a VA loan, there is no minimum credit score, but you can only get this type of home loan if you’re an eligible service member in the military, a veteran, or the surviving spouse of a veteran. While there’s no set minimum score, individual lenders can create their own guidelines.

Should You Focus on Improving Your Score?

If you have less-than-perfect credit right now, you might want to focus on building your score. It can take several months, but it’s very unlikely interest rates will go up anytime soon based on what the Fed has said so far. The Fed says they expect rates will stay around zero through 2021 and maybe 2022, although there’s no guarantee.

If you can make even modest improvements in your credit score, not only are you likely to be approved, but you may also get better terms. Focus on paying down your high-balance credit cards, cleaning up any errors, and in the meantime, also try to save for a down payment. If you have at least 10% for a down payment, a lender will see you as less risky.

WRITTEN BY ASHLEY SUTPHIN

Original Post

 

Adverse Possession Laws AKA Squatters Rights (and How One Handyman Fought Back)

 Adverse possession, aka squatters rights, refers to a third party intentionally occupying a property to establish ownership over time – and it’s the bane of many landlords’ existence. Though laws vary by state and county, trespassers who enter a property they don’t own must meet specific requirements to possess the home.

Let’s go over the broad circumstances where a squatter can claim your property, then break down how one handyman saved his mom’s home from a similar fate.

Requirements for Adverse Possession

While each jurisdiction has its own requirements, there are commonly shared overarching benchmarks – including:

Continuous possession of the land/property: The squatter must occupy the property continuously over a set period. Typically, the timeframe sits between five to 20 years.

Hostile possession: The trespasser didn’t lawfully gain possession of the property, such as through a lease or contract.

Open possession: The squatting is not a secret; it’s nearly obvious from the sidewalk.

Actual possession: The squatter must be using the land or property for its intended purpose.

Exclusive ownership: The trespasser behaves as if the property is theirs, meaning they are likely to pay property taxes while using the space.

If a squatter meets all of the stipulations outlined by the state and county, they can assume ownership of the property – leaving the original owner high and dry. That’s why one man took it upon himself to solve his mother’s squatting problem in an unconventional way: by becoming the squatter himself.

Flash Shelton Out-squats Trespassers

Flash Shelton isn’t just the founder of the United Handyman Association – he’s also a good son. After his father passed away and he attempted to sell the residence, he found squatters. Unfortunately, the local police said their hands were tied.

So Flash got creative.

“As soon as [the police] saw there was furniture in the house, they said I had a squatter situation, they had basically no jurisdiction, and they couldn’t do anything,” Shelton told Fox Business. “So, I dissected the laws over a weekend and basically figured out that until there’s civil action, the squatters didn’t have any rights, so if I could switch places with them and become the squatter myself, I would assume those squatter rights.”

As a precaution, Flash had his mother draw up and notarize a lease agreement. Then, he waited for the squatters to leave. Flash arrived at the home around 4 am and saw the squatters leave around 8. At that point, he put up cameras all around and inside the property. Then he changed the locks.

“They didn’t have a lease, so that never came into play. But when they came back, I just laid it out for them, told them that it was all locked up, cameras, and the only way they would get back in the house is if they broke in on camera, and I would prosecute. I told them they had a day to get their stuff out or the furniture was not theirs anymore.”

Flash’s unconventional methodology worked. The squatters left within the day.

When asked why he took this approach, Flash said, “The law would prevent me from physically removing them. However, being that I wasn’t the homeowner, I had more rights. As a tenant, I would actually have more rights than [the squatters].”

Now Flash runs a business offering similar services to other property owners struggling with trespassers. He’s also advocating for legislative change.

“I feel bad,” he said. “I can’t help everyone, but if we can change the squatter laws, I feel like that’s the way I can help everyone.”

While TurboTenant doesn’t recommend out-squatting the squatters yourself, we make it easy for landlords to create customizable state-specific lease agreements in less than 15 minutes. Protect your property by including provisions regarding unwanted guests, holdover tenants, and so much more in just a few clicks!

By: Krista Reuther

Original Post

A Guide to the Mortgage Interest Deduction

 

When you have a mortgage, there’s a deduction you can take on your taxes for the interest you pay on your first $1 million of debt. If you’re a homeowner who bought your home after December 15, 2017, you can deduct interest on the first $750,000 of your mortgage. If you are going to claim a mortgage interest deduction, you have to itemize your tax return.

The following is a guide to what to know about the mortgage interest deduction and how it works.

The Basics

The mortgage interest deduction lets you reduce taxable income by the amount you pay on the interest of your mortgage during the year. If you have a mortgage and keep up your records, you can lower your tax bill. Generally, as mentioned, you can deduct the interest paid on the initial $1 million of your mortgage for a primary or second home. For buyers who purchased after December 15, 2017, you can deduct what you paid on the first $750,000.

What Qualifies?

• If you’re deducting mortgage interest for your primary home, typically, the following will count:
• Your property can be a mobile home, house, apartment, condo, co-op, house trailer, or even a houseboat
• Your home has to be the loan’s collateral.
• The home needs to have sleeping, toilet, and cooking facilities.
• If you get a housing allowance from the military or through the ministry that’s not taxable, you can still deduct the interest for a mortgage.
• A mortgage you get to buy out the other half of your home in a divorce also counts.

If you have a mortgage on a second home, the following will qualify you:

• You don’t need to use the home throughout the year
• The house has to be the loan’s collateral
• If you rent out your second home, you need to be there for the longer of at least 14 days or over 10% of the number of days you rented it out

Points are prepaid interest you can get on a loan. You can deduct your points gradually through the life of your loan, or if you meet certain requirements, you can deduct them at the same time. The eight requirements you have to meet to deduct your points all at once include:

• The mortgage has to be for your primary home
• It’s an established practice to pay points in your area
• Your points can’t be abnormally high
• Your points aren’t for closing costs
• The down payment you make is higher than your points
• The points are calculated as a percentage of your loan
• The points are on your settlement statement
• You use a cash method of accounting on your taxes

If you have a late payment charge that wasn’t for a specific service done in relation to your mortgage loan, you can deduct that. If you pay your mortgage early, you might have a prepayment penalty. You can deduct that penalty as interest.

You can deduct the interest if you have a home equity loan and use it to buy, substantially improve, or build a home. If you use the money for something not related to your home, it’s not deductible.

What’s Not Deductible?

Finally, the things that aren’t deductible include extra principal payments you make on your mortgage, homeowners’ insurance, title insurance, and settlement costs for the most part. Down payments, earnest money, or deposits you forfeit aren’t deductible or interest on a reverse mortgage.

To claim a mortgage interest deduction, start by looking for your Form 1098, which your lender sends in January or the start of February. Form 1098 outlines how much you paid in interest and points during the year. Your lender will send a copy to the IRS as well. If you paid at least $600 in mortgage interest, which includes points, you’d get a 1098.

You’ll need to itemize your taxes rather than taking the standard deduction when you complete your taxes.

When you itemize your taxes, it can take some more time, but if your standard deduction is lower than available itemized deductions, you should do it to save money anyway. You can use Schedule A to calculate deductions, and tax software will take you through the steps.

WRITTEN BY ASHLEY SUTPHIN

Original Post

I Want to Give My Daughter and Her Husband $50,000 For a Down Payment. Do I Have to Worry About the Gift Tax?

Imagine you have $50,000 to give to your daughter and her husband for a down payment on their new home. The question is, will you owe gift taxes because of your generous gesture?

Despite popular framing, the federal gift and estate taxes only apply to very wealthy households. Unless you have approximately $13 million to give away over your lifetime, these taxes likely won’t apply to you.

To be very clear, these are the rules for federal taxation. Every state also has its own tax laws and every tax profile is different, so make sure to speak with a financial or tax professional before making any plans for your own assets. However, there are two main issues to consider within this scenario: the mortgage process and potential gift tax implications.

Down Payments and Gifts

With the mortgage and lender process, you want to ensure that you fill out all forms and requirements correctly. It is extremely unlikely that you can complicate the title to this property, but you can certainly complicate or invalidate the loan by making a mistake.

When your daughter applies for her mortgage, the lender will go through her finances in detail. They want to know what assets she has, where they came from, what income she has and any other information related to how she will repay this debt. The down payment is intended as an indicator of this financial stability, so receiving it from a third party can raise concerns.

Many lenders have rules around who can provide the money for a down payment. It's common for them to reject a mortgage with a gifted down payment unless that money comes from someone with a longstanding relationship to the borrower. Among other issues, this is intended to prevent fraud and money laundering. Since the borrower is your daughter, that shouldn’t be a problem.

If you are giving the money directly to your daughter you will typically either need to "season" the money or provide a gift letter. Seasoning the money means transferring it more than 60 days in advance, again as an indicator of legitimacy against fraudulent transfers. A gift letter is a document signed by both the giver and the recipient confirming that this is a unilateral transfer with no right to repayment.

The specific format of the gift letter will vary based on lender and jurisdiction, so consult an attorney about this document. A financial advisor can also potentially help you through this process.

You may also make this transfer through the loan process, making the down payment on your daughter's behalf rather than transferring the money to her. The lender will require you and your daughter to disclose this during the loan application process. In and of itself, your gift will typically not be a problem, but failing to specify the difference between borrower and payer will almost always complicate (if not invalidate) the loan.

Gift Tax Exclusions and Exemption Limits

Beyond the rules that surround making a gift of this sort, your main consideration here is the gift tax.

This is a tax that the IRS places on unilateral transfers. If you give someone money or assets without expecting fair-value compensation in return, you have given them a gift. If you give them enough money, eventually you (the gift giver) must pay taxes on the transfer. Gift tax rates range from 18% to 40% based on the size of the gift.

However, the gift tax only applies to very few households due to a pair of important tax provisions: an annual exclusion and a lifetime exemption limit. And if you have additional questions about either, consider speaking with a financial advisor.

Annual Exclusion

The first is the gift tax's annual exclusion. This is the amount of money you can give to someone each year regardless of gifts in past or future years. In 2023, the annual exclusion is set at $17,000 for individuals and $34,000 for married couples who file their taxes jointly. In 2024, those limits will increase to $18,000 for individuals and $36,000 for married couples.

The annual exclusion applies on a per-recipient basis. So, for example, say that you had four children. You could give each of them $17,000 in 2023 without triggering any gift taxes.

Lifetime Exemption

The lifetime gift and estate tax exemption is the amount of money you can give away over the course of your life – or at your death – without triggering either gift or estate taxes. For gifts that exceed the annual exclusion, the difference is applied to your lifetime exemption. If you give someone a gift over that year's annual exclusion and have exhausted your lifetime exemption, you’ll owe gift taxes on the amount of money that exceeds that year’s exclusion.

In 2023, the lifetime gift and estate tax exemption is $12.92 million for individuals, which means married couples have a combined exemption limit of $25.84 million. In 2024, the exemption will increase to $13.61 million for individuals and $27.22 million for married couples. If an individual has already gifted $12.92 million over the exclusion limits by 2023, they will be able to gift another $690,000 in 2024 (not including the annual exclusion amount).

Unlike the annual exclusion, the lifetime exemption does not reset. While you can gift up to the annual exclusion each year, any remainder permanently reduces your lifetime cap. The lifetime exemption is on a per-donor basis, meaning that it applies collectively to all gifts you have given. For example, say that in 2023 you give $20,000 to each of your four children. Each gift exceeds the exclusion by $3,000. Collectively, they would lower your lifetime gift and estate tax exemption by $12,000.

Gift Taxes And Down Payments

When it comes to your daughter's down payment, the tax issues are this: Are you married? And how much have you given away throughout your life? Let’s assume you’re single for simplicity’s sake.

First, if you give her the down payment money in 2023, the first $17,000 of the gift will automatically be free of any potential tax liability. However, since the gift exceeds the annual exclusion by $33,000, that remainder will lower your lifetime exemption.

So, for example, if you have never given anyone a taxable gift, you will pay no gift tax and your annual exclusion will be reduced to $12.887 million ($12.92 million minus $33,000). If you have already exhausted your lifetime exemption, you would have to pay taxes on the $33,000.

However, there would still be ways to manage this potential tax liability. If you could wait until 2024 to give your daughter the money, your lifetime exemption would go up to $13.61 million. You can apply the remainder to the newly raised cap and will owe no taxes on the excess gift. But if you need additional help managing your tax liability, consider working with a financial advisor.

Bottom Line

Unless you have gifted more than $12.92 million over your lifetime, you can almost certainly give a $50,000 down payment to your daughter or other family member and not owe gift taxes in 2023. Just be careful to do the paperwork right, otherwise, it could complicate the loan.

Gift Tax Tips

• Will the fact that this is your daughter complicate things? While the IRS does not treat gifts from parents differently, large gifts within a wealthy family can potentially complicate future planning around trusts and estates.
• A financial advisor can help you strategically give away assets to lower your potential estate tax liability. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.

BY: Eric Reed

Original Post

 

Are Home Improvements Tax Deductible?

There are tax implications of making home improvements, but only in specific situations. When it comes to your taxes, a home improvement might include any work done that increases the value of your home substantially, improve the useful life of the property, or creates new uses.

We’ll get more into what that means specifically below.

Home Improvements vs. Repairs

First, the money you spend on your home in terms of taxes can be divided into improvements and repairs.

The cost of capital improvements can be added to your tax basis in your house. Tax basis is what’s subtracted from the sales price to figure out how much your profit is. With that in mind, you can only take advantage of this if you’re selling your home.

A capital improvement in this context is what was mentioned above—anything that adds value, adapts a home to new uses, or prolongs its life. Something that you could include as a capital improvement might be a new roof or central air-conditioning.

Capital improvements don’t have to be big purchases either—something like storm windows counts or a home security system.

Repairs can’t be added to your basis. Repairs might include painting your home or fixing your gutters.

If you make improvements to your home, make sure you keep records of everything so you’ll have them if you do sell.

Tax Deductions for a Home Office

One way you could save on your taxes and improve your home at the same time is to build a home office. You get a small deduction on improvements you make to your home if you’re using one of the rooms exclusively as your work area, which many people are doing now.

Any repairs benefiting your home can also be deducted, based on the percentage amount of your home used as an office.

Similarly, if you rent out a part of your home, you might be able to deduct what you make in improvements to that area. If you were to, just to give you an example, add a bathroom to the area of your home you rent, you might be able to write that off in its entirety.

Medical Modifications

If a health care provider suggests modifications to your home to help you or to allow you to provide care for your family member, such as an aging parent, the expenses of these updates may be deductible. Examples include adding a wheelchair ramp or modifying your doorways. If the improvement adds value to your home, on the other hand, it’s not deductible.

Upgraded Energy Systems

The IRS has residential energy-efficient property credits. Qualifying properties according to their guidelines updated in April 2021 include solar electric, solar water heaters, fuel cell property and small wind turbines. Also included are geothermal heat pumps.

Improvements qualifying for a residential energy property credit include adding energy-efficient exterior windows and doors and skylights and roofs that are metal or asphalt. Insulation updates are included, and so are upgrades to heating and air systems to make them energy-efficient.

There are some ways to save on your taxes by upgrading your home, but limitations also exist. If you’re unsure of anything, it’s best to talk to a tax professional because guidelines can change from year to year.

WRITTEN BY ASHLEY SUTPHIN

Original Post

After Financing Your First Rental, It’s All Downhill From There

 

At its most basic level financing a rental property is not much different than a primary residence as it relates to income, assets, credit and the like.

Financing programs for rental properties will require more down payment and higher rates. Why? Because when someone finds themselves headed into some degree of financial stress, the last thing they want to give up is their primary residence.  When push comes to shove, the rental properties will be off-loaded first, securing the primary residence as a place to live. Financing the first requires more documentation, but after that, financing a second and third rental is easy-peasy in comparison.

With an initial rental, buyers must be able to comfortably afford the new purchase along with their current mortgage. Lenders use the mortgage payment on the new property which includes principal and interest, taxes and insurance in addition to what they’re currently paying on their current home. That might sound a bit unfair at first because a rental property typically generates enough income each month to more than cover the costs of ownership. 

Otherwise, real estate investors might pass on a unit that doesn’t cash flow. The new property turns into a monthly expense instead of monthly income. Ultimately it means qualifying with two house payments even though the income is there, it’s just that lenders won’t consider it. But things change with the next rental property.

With the subsequent unit, the income generated from the home can in fact be used to help qualify. That is after two years have passed. Why the time test? Lenders want to see the owners can properly manage the property, keep it rented and maintained. Being a landlord means extra work. After the first year or so of ownership, some first time investors find out that managing the property is simply too much work. 

If after two years have passed, the income can be used. Now there is effectively just one mortgage payment, the primary residence. The second rental unit mortgage payment is not only offset by the rent coming in each month but providing the owner with some additional income at the same time.

When investors discover this underwriting guideline for a second rental, they may decide to acquire a third or fourth. Qualifying for the second unit and beyond is much easier due to the fact that lenders will  use the additional income. 

In fact, it’s not uncommon for investors to own multiple rental units because it’s so much easier to qualify for the subsequent purchase. When an investor does own several rental units, a property manager is essentially a must. It can also be the case where investors who own multiple units decide the ‘working world’ isn’t worth it any longer and instead own, manage and maintain their units and live off the rent.

There’s a little math involved when considering a rental purchase but not very much. If there’s a positive cash flow, then it’s time to submit an application and get the preapproval process moving forward. You’re then likely to begin looking for the next property. Yet the approval process will be much easier.

WRITTEN BY DAVID REED

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