Changes in tax law may prompt homeowners to other states

By https://www.washingtonpost.com/people/kenneth-r-harney/ Kenneth R. Harney December 6

Whether you already own a home or are thinking of purchasing, the tax legislation pending before Congress poses serious questions: Am I going to get smacked with punitive new taxes? Will the value of my home decrease because previous real estate tax benefits have been stripped away? Or am I one of the lucky ones, well insulated against big losses?

Prospective buyers such as Matthew Wie and Joe Weber already have figured some of this out and are taking defensive steps. Weber owns a house and lives with his family in the San Francisco Bay area, and Wie owns a home in Delaware. Both are looking to move and are considering shifting their home searches to locations where they will be less exposed to tax increases triggered by the new legislation.

https://www.washingtonpost.com/news/fact-checker/wp/2017/12/04/the-gops-100 00-cap-on-property-tax-deductions-and-how-it-affects-one-congressional-distr ict/> The GOP’s $10,000 cap on property tax deductions and how it affects one congressional district

Weber told me in an interview that as residents of California, he and his family face a dilemma: If the final federal tax bill slashes deductions of state and local taxes (SALT), purchasing a new home in high-tax California will be significantly more expensive.

“I’ll only be able to afford less,” he said, with presumably a lower price tag and less space than he and his family could obtain elsewhere. So the Webers are seriously thinking about expanding their home search to either the Reno, Nev., area, where taxes and prices are much lower and where Weber has identified good school opportunities, or Seattle.

Wie and his wife and daughter are contemplating a similar scenario – moving from Delaware to Pennsylvania. “We’re relatively high earners,” Wie said in an email, “so the flat 3.07 percent Pennsylvania [income] tax would benefit us more than the higher property taxes or [the federal] tax change would hurt us.” Wie’s wife’s employment location and local school quality also are key considerations.

https://www.washingtonpost.com/realestate/portions-of-senate-tax-bill-are-h arsher-on-homeowners-than-the-house-proposal/2017/11/14/9bb04aec-c8b6-11e7-8 321-481fd63f174d_story.html> Portions of Senate tax bill are harsher on homeowners than the House proposal

Wie and Weber participated in a national survey of 900 prospective home buyers conducted by real estate company Redfin. https://www.redfin.com/blog/2017/11/a-third-of-homebuyers-will-consider-mov ing-to-another-state-if-salt-deductions-are-eliminated.html> The survey found that 33 percent of people who expect to purchase within the coming 12 months say they would consider moving to a different state if Congress eliminates SALT deductions. The Senate- and House-passed tax overhaul bills would https://www.washingtonpost.com/news/fact-checker/wp/2017/12/04/the-gops-100 00-cap-on-property-tax-deductions-and-how-it-affects-one-congressional-distr ict/?utm_term=.2cdfa9ea3656> cut maximum SALT deductions to $10,000 and limit them to property taxes only.

Other matters for owners and potential buyers to consider:

● Home values impact. Although no independent or academic studies have been published estimating the effects of the new tax legislation on home values and prices, most studies to date have concluded that federal tax benefits are a component of property values. Strip these away and buyers will not obtain the full traditional financial benefits of ownership, and they will pay less for homes.

Economists at the National Association of Realtors estimate that https://www.washingtonpost.com/news/business/wp/2017/12/02/trump-waffles-on -corporate-tax-rate-demand-central-plank-of-gop-tax-plan/?utm_term=.3f1ab954 1a91> the tax changes could whack 10 percent off average prices around the country, with declines steeper in states with higher home costs and tax burdens, lower in areas with more moderate prices and taxes. The flip side of all this, of course, is that if prices do decline, that will make purchasing a home more affordable – potentially good news for renters and move-up buyers priced out of the current marketplace.

● Tax-free capital gains exclusion. Under the legislation, https://www.washingtonpost.com/realestate/portions-of-senate-tax-bill-are-h arsher-on-homeowners-than-the-house-proposal/2017/11/14/9bb04aec-c8b6-11e7-8 321-481fd63f174d_story.html?utm_term=.6768f24e662d> owners will still be able to “exclude” up to $500,000 ($250,000 for single filers) of gain on their home sales. But to qualify, they will need to have lived in their house for five of the preceding eight years; for decades, the standard has been two out of the preceding five years. For many buyers who own homes for extended periods, this change won’t matter. But for others it could pose problems, especially for people who transfer jobs in less than five years and owners forced to sell because of divorce, health or other issues.

● Mortgage interest, second home deductions. As of this writing, House and Senate conferees had not agreed on https://www.forbes.com/sites/kellyphillipserb/2017/12/03/from-tax-rates-to- deductions-comparing-the-house-senate-bills-to-current-law/#788dde9673b0> whether to cut the home mortgage interest deduction maximum to $500,000 or to eliminate interest write-offs on second homes. Both are only in the House version and would primarily affect upper-income owners.

So where does all this leave you? It depends on what you own, where you live, what you earn and what you may want to buy. Overall, the Republicans’ tax changes look like a net plus for corporations and stockholders but a net negative for people who have benefited the most from the tax code’s longtime preferences for homeownership over renting.

Less-stringent standards open options for home buyers

Kenneth R. Harney on Dec 1, 2017

WASHINGTON – Here’s an important question for anyone hoping to buy a home next year but who isn’t quite confident about qualifying for a mortgage- Is it true that lenders have eased up on certain key requirements, making it simpler for first-time buyers and others who can’t pass all the strict tests to get approved?

The good news answer is yes. A recent survey of banks and mortgage companies by giant investor Fannie Mae found that a record number of lenders report that they have relaxed at least some requirements for mortgage clients.

In recent months, standards on debt-to-income ratios, minimum down payments and student loan debt have been made less stringent. Both Fannie Mae and fellow mega-investor Freddie Mac – who are key to the mortgage market because they set the guidelines and buy vast quantities of the mortgages originated by banks and mortgage companies – have taken steps to accommodate a wider swath of home buyers.

Debt-to-income changes are at the top of the list. Under previous rules, your total monthly debt load could not exceed 45 percent of your monthly household gross income. Under the new rules, your total monthly debt can now go to 50 percent. With Federal Housing Administration (FHA) loans, you can push it even higher – 55 percent or 56 percent – provided that other aspects of your application are strong.

The net effect of the debt ratio policy change? “This is huge,” Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, told me last week. “It makes it much easier for a lot more people to qualify.” Often they’re younger buyers carrying the typical burdens of starting new households along with heavy student debt. They’re also families who’ve survived challenging economic times and are paying off lingering credit card balances and other bills.

Fannie Mae’s recent change in the way it handles student loans for calculating debt ratios is another big deal. In cases where mortgage applicants are covered by income-based reduced-repayment plans, and their artificially low payment is listed on their credit reports, lenders now have the option of qualifying them on the basis of that reported amount.

About 5 million Americans participate in reduced-repayment plans. Under previous rules, lenders were forced to impute payment terms for borrowers using these plans. Even when credit reports indicated the borrowers were paying little or nothing, lenders computing debt ratios were required to factor in monthly payments equal to 1 percent of the outstanding balance on the student debt. Say the reduced repayment plan cut the required payment to $75 or to zero. Instead of adding 1 percent of the student loan balance to the applicants’ monthly debt calculation, lenders can now use the actual amount being paid under the plan – zero if the credit report says zero.

Down payment minimums also have been slashed, with many lenders now requiring just 3 percent down on conventional mortgages. FHA still requires 3.5 percent. A handful of lenders are offering 1 percent or zero-down conventional loan options, where they provide gifts – guaranteed non-repayable and no hike in interest rate or fees – for certain borrowers, typically those with solid credit histories. One large Midwestern bank made a splash last month with a zero-down mortgage plan that also includes a gift of up to $3,500 toward closing costs.

What about credit scores? Any easing going on there? Not so much, but you have to look below the surface of the reported statistics to see what’s really happening. Though the average FICO credit score for home purchase loans at Fannie Mae and Freddie Mac in October remained near where it’s hovered for years – an elite 754 – the reality is different. According to Ellie Mae, a software and analytics company that tracks terms on new mortgages, nearly one-third of purchase loans closed at Fannie and Freddie in October carried FICOs below 700. Twenty percent had FICOs between 650 and 699. And a small but noteworthy few (0.64 percent) even had scores below 600.

The takeaway- Be alert to the changes underway. Standards are not necessarily as strict and exclusive as you may assume. It all depends on what your application looks like in total. If you’ve got solid “compensating factors” – maybe a low debt ratio or higher than typical down payment or reserves – your sub-par credit score may not be the deal-killer to a home purchase you assumed it would be.