Mortgage Insurance Tax Deductibility Extended Through 2011

The President has signed the bill extending Mortgage Insurance tax deductibility through December 31, 2011. This makes it a great time to use MI to buy a home sooner and enjoy predictable payments, while benefiting by deducting the premiums from your income taxes. And MI can be canceled once the home buyer builds enough equity.

Details on Tax Deductibility for MI Remain Unchanged

• The home purchase or refinance loan must close between January 1, 2007 and December 31, 2011;
• Household income must be at or below $100,000 for a full deduction of premium;
• The premium deduction is reduced 10% for each $1,000 of income over $100,000;
• The premium deduction is prorated in the first year based on the month the loan closes;
• Applies to primary residence and one other residence purchased for personal use by the taxpayer;

Monthly, annual, and single MI premiums are eligible. Financed premium deductions should be taken over a seven year period.

Want to increase the size of your 2010 tax deductions?

Want to increase the size of your 2010 tax deductions? Consider making your upcoming January 2011 mortgage payment while the calendar still reads 2010. Use the Tax Code to your advantage…

An "early" payment increases your 2010 tax deductions because of how mortgage interest works within federal tax code. Unlike rent which is paid in advance at the beginning of a month, interest on a mortgage is always due at the end of the month -- after the money's already been borrowed from the bank.

When you study a mortgage statement, you'll notice that it's actually a bill for the interest that built up during the prior 30 days. January 2011's mortgage statement, therefore, is a bill for December 2010's accrued interest.

For a lot of homeowners, that mortgage interest is tax-deductible in the year in which it was paid. So, to boost your 2010 mortgage interest tax deductions, simply pay your January 2011 mortgage statement before the New Year.

Simple, right? Well…there are caveats of timing your mortgage payment…

Before you send that January mortgage payment to your servicer early, it's important to remember that you're dealing with federal tax code. There's going to be caveats, exceptions and special cases that impact your eligibility so be sure to review your individual situation with an accountant before moving forward.

The first gotcha of which to be aware is that is not every mortgage is mortgage interest tax deduction-eligible. The IRS does a pretty good job of outlining mortgage eligibility via the flowchart located at http://www.irs.gov/publications/p936/ar02.html. You can follow along at-home to make sure your loan qualifies.

The second gotcha is the Alternative Minimum Tax (AMT). Because of AMT, some filers will find their "normal" tax deductions pared -- including some related to the mortgage. This may reduces the benefits of making January's mortgage payment in December.

In the eyes of the IRS, you're allowed to make January's mortgage payment in December because the payment is actually due. If you try to pay February in advance as well, you won't have much to gain. This is because paying February before the mortgage interest has accrued is considered to be a "prepayment" and prepaid mortgage interest is rarely tax-deductible.

There are 10 Days Left In 2010

If you're planning to make your January payment early, don't cut it close. It's a popular vacation time and servicers are short-staffed. Send your payment prior to Christmas, if possible. You want to give your lender ample time to receive and process paperwork.

And, again, talk to your accountant first. The "pay early" plan could be a wasted effort, ultimately, depending on your individual taxpayer profile.

The complete IRS guidance on home mortgage interest tax deductions is available online at http://www.irs.gov/publications/p936/ar02.html.

Home Sale Prices On The Rise!

The S&P Case-Shiller Index for April, released Tuesday, showed both month-to-month and year-over-year increases in seasonally adjusted metro Atlanta home sale prices. The increase, nearly 1 percent from March, came after the index had dipped to its lowest level since November 2000. The year-over-year increase was slight, with a gain of a quarter percent over April 2009. Nationally, the 20-city Case-Shiller Index showed seasonally adjusted prices up one-half percent in April from March, while up 4 percent from April 2009.

Is this good news?

Yes! The quarter percent increase is the first positive year-over-year movement the Atlanta index has seen since September 2007. Even if the index stays flat month-to-month in May, the annual improvement will follow into next month’s data.

Source: The Atlanta Journal-Constitution

Change in FANNIE MAE guidelines: Underwriting Borrowers with a Prior Foreclosure

Fannie Mae has issued Announcement SEL-2010-08, Underwriting Borrowers with a Prior Foreclosure, to modify the waiting period that must elapse before a borrower is eligible for a new mortgage loan after a foreclosure. A seven-year waiting period after a prior foreclosure will apply for all borrowers, unless the foreclosure was the result of documented extenuating circumstances, which requires a three-year waiting period with additional eligibility requirements.

Important Lending Changes!

Beginning June 1, 2010, just before settlement, Fannie Mae will be running last minute credit report checks to ensure borrower's credit has not changed since loan application. The purpose is to find out whether the borrower has accrued or shopped for new debt.

Many homebuyers get excited once they have an accepted contract on a home, and realize they will need new furniture and decorations for the house. What some do not realize is that they should not open an account at a store or make these large purchases because they effect their debt-to-income ratios for their loan.

With these new regulations, if a Fannie Mae homebuyer does this, they risk a delay in settlement as the lender does more research and reviews the file further, creating problems for themselves and the sellers of the house they are buying.

The Washington Post reported on this new policy, and made a few notable points:

"Fannie's 'loan quality initiative' will require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of borrower occupancy plans for the property, Social Security numbers and Individual Taxpayer Identification Numbers."

Essentially, to ensure you get their dream home and are able to close on the house, make sure you DO NOT open or apply for ANY lines of credit from the time you make loan application to closing, or make any large purchases which deplete your savings or increase your credit card balance. That is the only safe route!

- Owen Jennings, Covenant Mortgage