Tag: mortgage lending

Taxes and homeowners Perspectives

How The Tax Bill Affects Homebuyers

For years, the US tax code has encouraged Americans, especially first-time homebuyers, to get “a piece of the American dream” by becoming homeowners. Since the 1940s, America has seen the positive effects of building credit and building equity through homeownership.

America is one of the few countries in the world to offer potential homeowners a fixed-rate 30-year mortgage product. Homeowners have benefited for decades from tax incentives that allow us to deduct mortgage interest from our tax bill, and from home equity lines of credit that can help pay for a child’s college tuition.

Get ready for some changes in 2018.

This week, both the US House of Representatives & US Senate passed the most sweeping changes to the US tax code since 1986. The new tax bill cuts the corporate tax rate, revises the existing tax bracket structure at every income level, and includes several significant changes to deductions that historically offered incentives to first-time homeowners.

The bill is ready to be sent to President Donald Trump, and could be signed into law before Christmas, so we at STEM Lending wanted to tell you about several specific changes that are likely to affect your search in 2018:

tax code us tax bill

How The New 2018 Tax Bill Could Affect You:

Mortgage Interest Deductions

Mortgage interest deductions were once thought to be untouchable as a strong incentive for first-time home buyers. The history of this incentive was originally a part of a 1913 tax provision which allowed business owners (ex. farmers) to deduct any interest they paid on business expenses. The mortgage-interest deduction now lets people who buy homes deduct part of the cost of their mortgage on their taxes. According to the Joint Committee on Taxation, MID saved Americans $77 billion last year!

What was finalized in the new tax bill, however, caps the limit on deductible mortgage debt at $750,000 for loans taken out after Dec. 14, 2017.  If you took out a mortgage loan before Dec. 14, you will still be able to deduct interest on mortgage debt up to $1 million. Mortgage interest on second homes can be deducted but is subject to the $750,000 limit.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Mortgage interest

You may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.

For homes bought before Dec. 15, 2017, no change. But for homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000($375,000 if married filing separately).

Property Taxes

Currently, taxpayer can fully deduct what they pay in state and local property, income, and sales taxes from their federal tax returns. The new tax law in 2018 caps these total deductions at $10,000. This new law may have a very real affect on your bottom line if you reside in a state with above-average local and state taxes like New Jersey, New York, Oregon, or California. *One caveat* the $10,000 cap can be any combination of property, income, and sales taxes. This compromise between House & Senate Republicans was very closely watched, and will surely be a rallying point in the coming months, when midterm elections are held.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Property taxes

You may deduct the property taxes you pay on real estate you own.

You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

Capital Gains Exclusion

If you’re planning on selling your house in 2018, you know that capital gains taxes = the difference between the price you paid for the house and the price you ultimately sell it for. If you have not lived in the home you are selling for at least two years, your capital gain is treated as taxable income under the ‘ordinary income’ tax brackets (which also just changed). Home sellers can benefit by excluding up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home as long as the homeowner has lived in the residence for 2of the last 5 years.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Capital gains

In order to qualify for this provision, it is mandatory that you have lived in the home as your primary residence for at least 2 of the last 5 years, before selling.

With all the 2018 tax changes set to take effect January 1, 2018, how will this affect your decision to buy a home? If you are looking at getting pre-approved, or already searching with a real estate agent, give us a call at 646-798-1800, or email us at support@stemlending.com so we can help find you the best mortgage loan. Visit STEM Lending to apply online, or learn more about the mortgage process.

We look forward to helping you find your dream home in 2018.

Perspectives

Explaining Debt-to-Income “DTI” and Its Importance

When mortgage lenders approve borrowers for a loan who have completed applications on STEM Lending’s site, that decision is based on a standard set of guidelines that are generally determined by the type of loan program. Today, we are going to focus on one of the main components of a mortgage approval: Debt-to-Income (DTI) Ratios.

Many potential home buyers have only a rough idea before applying — even for a pre-approval letter — about their own DTIs, how lenders view them, and what sort of obstacles they’re likely to encounter.

How Do I Calculate DTI?

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.  This number (reflected as a %) is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

For example, if you pay $2000 a month for your mortgage and another $200 a month for an auto loan and $500 a month for the rest of your debts, your monthly debt payments are $2700. ($2000 + $200 + $500 = $2,700.) If your gross monthly income is $7000, then your debt-to-income ratio is 38.57 percent. ($2700 is 38.57% of $7000.)

What is Front-End vs. Back-End DTI?

Debt ratios for home loans have two components.

The Front-end DTI ratio measures your gross income from all sources before taxes against your proposed monthly housing expenses, including the principal, interest, taxes and insurance that you’d be paying if the lender approved the mortgage you’re seeking.

The Back-end DTI ratio measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards, your back-end ratio maximum was capped at 43%, although with recent announcements from Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, there is wiggle room case by case

Why is the 43% Debt-To-Income Ratio so Important?

For loans to be eligible for sale to Fannie Mae or Freddie Mac, lenders have to follow the 43% guideline set by the GSEs.

The federal “qualified mortgage” rule sets the safe maximum at 43%, although Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) all have exemptions allowing them to buy or insure loans with higher ratios.

FHA traditionally allowed DTIs over 50% for some borrowers, however those borrowers have to pay private mortgage insurance (PMI) for the life of the loan.

Freddie Mac also uses private mortgage insurance and will accept loan applications with DTIs above 45%.

Fannie Mae will be raising its DTI ceiling from the current 45% to 50% as of July 29, 2017.

Fannie Mae also uses private mortgage insurance on its low down payment loans, but the premiums are automatically canceled when the principal balance drops to 78% of the original property value.

As an prospective borrower, your application will still have to go through Fannie’s automated underwriting system (Desktop Underwriter), which examines your entire application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes.

Takeaways

Studies by the Federal Reserve and FICO, the credit scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

In general, we think your front-end and back-end DTI ratios should be 28% and 36% respectively, or lower.

  • FHA limits are currently 31/43, though these can be higher with justification from the lender.
  • VA limits (for veterans) are only calculated with one DTI of 41.
  • Conforming loans have to conform with the DTI limits we mention above for your mortgage loan to be eligible for sale to Fannie Mae and Freddie Mac
  • However, a non-conforming (Jumbo) loan does not conform to purchasing guidelines set by Fannie Mae and Freddie Mac

To learn more about DTIs, head over to Fannie Mae’s “Know your options” site (www.knowyouroptions.com).

As always, follow our STEM Lending Blog for more relevant content for you as your home buying process moves forward.