Credit Score Factors Simplified

Your credit score can have an impact on your financing options and the cost of the financing you choose depending on the loan program, the purpose of the loan request (purchase/refinance/cash-out refinance) and the disposition of the subject property (owner-occupied, secondary residence, investment). The infographic below illustrates the 5 factors that determine your credit scores (the mortgage industry uses the middle of the numeric scores from Experian, Trans Union, and Equifax) and the weight each factor has in determining the score.

Reviewing credit is one of the first and most important things to be done when considering a home purchase or refinancing a mortgage. If your score comes up a little short, there are strategies that may help get it back in line quickly. If more work is required, taking the right steps now will put you on track to achieve your real estate goals as soon as possible.

Mortgage Rate Talking Points 02/2017

  • After testing their all-time lows in July, rates trended higher during the latter part of the Presidential campaign season then rushed to new 18 month highs immediately following the election.
  • Bond investors are increasingly wary (some are convinced) that the DECADES-long trend to lower rates is now over. While confirmation of this is impossible, market psychology is defensive in anticipation of higher rates ahead.
  • The Trump administration's stated fiscal policies are a contributor to the upward rate momentum, however, the markets have paused and been relatively stable within a range in the low 4's for the past 10 weeks.
  • It is worth noting that rates are below their 2016 high and that despite firm economic reports the Federal Reserve appears hesitant to raise rates pending clarity on the new administration's fiscal policies.

Tax Benefits Play a Large Role in Wealth of CA Homeowners

Image result for home owner tax benefitsEveryone knows there are benefits, including tax savings, when you own a home rather than renting. As far as the tax benefits, however, most people aren't exactly sure what they are, how much they are worth, and how to take advantage of them. Here is a quick review with details that may help.

The MAJORS- these are the tax benefits that can save homeowners huge amounts of money.

1. Mortgage Interest. This is the deduction that most people associate with homeownership and for good reason.  All the interest paid on mortgages up to $1M used to purchase or improve a primary or secondary residence is tax deductible. For the median priced home in our area with an 80% mortgage, you are talking about a $20k deduction in the first year.

2. Property Taxes. The second largest part of a housing payment is property taxes and these too are deductible for both your Federal and State taxes.

3. Proposition 13. Passed in 1978 this landmark law caps County Property Taxes at 1% of property value and caps annual property reassessments at 2%. The impact for homeowners is stable property tax payments that lag far behind the property appreciation rate. Prop 13 along with a fixed rate mortgage allows homeowners to diminish their monthly housing payment against inflation year after year.

4. Capital Gains Exemption. This is one of the most valuable tax benefits of all, especially for people living in high appreciation areas like California. As long as you have lived in your home as your primary residence for 2 of the past 5 years your are exempt from paying tax on capital gains up to $250,000 for a single person and $500,000 for a married couple. This exemption could save a married couple $140,000 in taxes in the case of $500k or more capital gain. And there is no limit on how many properties you can use this exemption with. Unbelievable.

5. Proposition 60 & 90 Transfer of Assessed Value. As life changes so do our housing needs. Prop 60 and 90 are another huge benefit to homeowners who decide to make a lateral or downsize move after the age of 55. These laws allow homeowners to transfer their low Prop 13 tax rate to another property of lesser or equal value within the same county or another participating county.

6. 100K Unqualified Interest Deduction. Most people don't realize that they can write off the interest on home loan funds up to $100,000 that are used for any purpose. That is correct, credit card consolidation, autos, college, vacation- all deductible. Why borrow are higher rates with no tax deduction, use your home's equity to save money.

More tax breaks that save homeowners cash.

7. Homeowner's Property Tax Exemption. Owning your home as your primary residence allows you a reduction in your property's assessment ($7,000 in many CA Counties) and a lower tax bill than second homes and rental property.

8. Discount points. Almost everyone uses a mortgage to finance their home when they buy it and are likely to refinance their mortgage several times over their years as a homeowner. Points are interest paid in advance in exchange for a lower mortgage rate over the life of the loan and are tax deductible either in the year paid for purchases or over the loan term for refinances.

9. Home Office Deduction. These days more and more of us are working remotely and from home, thus it follows that more and more people are eligible to take the home office deduction. The main tests for the deduction are that you have a place in your home that is used exclusively for business and that you use it substantially and regularly in conducting your business. By the way, this deduction is also available if you rent your home.

10. Energy Credits. You can claim a tax credit of 30% of the cost of alternative energy equipment installed in your home including solar electric equipment, solar water heaters, and wind turbines. California also offers tax credits for energy savings improvements to your home.

11. Moving Expense Deduction. If you move to a new home because of a new job or a job transfer you may be able to deduct your moving expenses. If your new job is 50 miles further away from your old home than your old job was you should qualify to deduct the cost of moving your family, your belongings and any lodging during your move. This deduction is also available if you rent.

Remember that everyone's tax situation is unique. I recommend consulting a tax professional to confirm how deductions relate to your specific situation. Some real estate deductions are subject to income limitations or may be impacted by the Alternative Minimum Tax for high earners.
The End of Low Rates?

The biggest year-end story in real estate was undoubtedly rising mortgage rates.  Rates bottomed in July and rose slowly until the election when they went ballistic with one of the steepest rises we have seen in the past 8 years. Whenever we get an outsized move like that there is a lot of anxiety. Many people are projecting much higher rates this year and an end to the historic 'Low Rate Era' of the past 10 years. While the rise in rates is unsettling it is important to keep things in perspective. The chart below shows the swing lows and highs in mortgage rates since 2009. The recent rise brings us closer to the middle of the 8-year range. With the FED projected to raise rates three times in 2017 an upward bias in mortgage rates is expected, but even so, there is further to go before rates break out of the current multi-year range. Until that happens, rates are still very low with the potential to make lower lows in a future economic slowdown.

Looser Loan Guidelines and ALT Programs

A theme that is picking up steam recently is the easing of credit/underwriting guidelines and the emergence of new loan products. This is tracked in part by the index below and something concrete we see over time here in the office. Broadly, conventional, FHA and Jumbo loans are becoming more accommodative with various guidelines that may benefit some of your client scenarios this year.  In fact, HUD announced this morning the lowering of the FHA mortgage insurance rate by .25%, which takes a bite out of the recent rate increase for FHA borrowers.
There is also a new segment of ALT (alternative) Jumbo products now available for your clients with credit issues or that do not report much of their income on their income taxes for whatever reason.  Moderate to major credit events are allowed with limited seasoning requirements, deposits into bank accounts can be used for qualifying income, and sizable financial assets represent cash flow for qualifying income.