Is Your Mortgage Tax Deductable?

What I'm about to discuss should not be considered tax advice, but simply my suggestion that you contact your tax preparer to discuss your paticular tax implications.

That being said, most people believe that no matter what type of mortgage, property, or reason, if it is a loan on a home it is tax deductable. That couldn't be further from the truth and you need to be aware your mortgage interest may not be deducatable.

The tax code (as I understand it) stipulates that for the mortgage interest to be deducable, it must be your primary home, or qualifying second home, and must be a mortgage obtained during the purchase (or within 90 days of the close) of said home. Loans taken out for capital improvements (improvements to your home) are also considered purchase money loans even if obtained years after the purchase. You are also afforded the opportunity to take a $100,000 home equity loan, of which you can do anything with the money.

To illustrate, lets say you bought a $200,000 home as your primary residence and financed 80% of the value. All of the interest from the $160,000 mortgage would be tax deducatable. Then two years later you obtain another mortgage for$320,000, "cashing out" $160,000. You spend $40,000 of that money remodeling the kitchen, bathroom, and family room. Then you spend $20,000 on a new boat.

In this scenario only the interest on $300,000 of the new loan would be tax deductable. That is because the original $160,000 purchase loan amount is deductable, plus the $40,000 you spent on capital improvements, as well as the $100,000 "home equity loan" allotment. The portion of this loan not deductable would be the money spent on the new boat.

You may be asking yourself how would the IRS know how you spent the money. Well quite simply, when the IRS audits you, the burden of proof is on you to prove the deducation is tax deductable. That means you must provide proof of where you spent the money "cashed out" of the equity in your home. If you can't prove it was spent on a capital improvement, then you never did. I know you have heard it before, but keeping receipts is vital.

If the IRS determines you took a deduction without proof or without a legal reason, they will assess penalties and late fees on the amount of tax you are liable for. This is the exact reason it is detremental to work with professionals.

In closing, I must reinterate that you should counsel with a tax professional. As I mentioned before, tax laws change all of the time, so what I wrote in this blog may not be entirely accurate. I try to keep up with the changes, but my specialty is mortgage lending.

It's Time for a Big Change

The Reader's Digest version:
Scott and I made an exciting decision to sell Bridge Haven Mortgage to a large national bank, Wells Fargo. We made this move with one goal in mind, better service to our clients and business partners. With the backing of Wells Fargo Bank we will no longer have to depend on third party wholesale lenders to fund our loans. This allows us to do what we do best, provide superior service to our clients.

In-Depth Version:
I must preface this with a little background. As everyone is aware, our economy has suffered the deepest and longest recession since the end of the Second World War. This economic plunge began a little over two years ago when the credit markets iced over. Without going into detail, our economy is largely based on the availability of credit. When this crutch was removed, everything came tumbling down. The rest has been history.

Anytime something goes wrong, there is always a posse formed to root out the cause. Much like the witch hunts in times passed, the broker was singled out as the sole reason for the collapse of the mortgage industry, and subsequently the housing market. Although the broker industry enjoyed a 60 plus percent market share during the height of the housing boom, to blame them for the worst economic meltdown in 60 years is a little over-flattering.

Mortgage brokers are typically small business owners loosely connected through trade groups or net branching systems. Their business model is no different from your barber, plumber, or shop owner. They build a database of clients and sell money through a wholesale lender (or distributor as in the shop owner analogy). If the cause of this meltdown is solely attributed to a small business owner, our society has to take a serious look at our national economy.

The mortgage broker has no national voice (other than a weak trade association) and certainly doesn't have the money nor the organization to lobby lawmakers in Washington. When it was time to convene the witch hunt, the lowly mortgage broker became the defenseless target.

Albeit there was a tremendous amount of fraud being committed in all parts of the mortgage and housing industry. Every industry has its bad apples, but in a free market economy you have to accept the bad with the good. Eventually they always get caught and end up in a cell next to the 350 pound Bubba, who has a thing for white collar criminals.

The broker industry is slowly being pushed out of business. This is being done through guideline changes, regulations, and the big banks, which own a gross majority of the properties currently on the market.

The worse has yet to be seen for the mortgage broker as Washington continues to debate new regulations. We are seeing what happens when a group of law makers attempt to regulate an industry they don’t understand. But we know one thing; they won't be done until the broker is merely a memory.

Scott and I opened Bridge Haven Mortgage in May of 2007, just as the markets begin to slide. Great timing right? But we survived with only a few broken bones. We watched our industry largely change from conventional lending from Fannie Mae and Freddie Mac to government lending from FHA and VA.

Government lending has become a solid tool in turning around the housing market. However, over the last year we have watched the wholesale lending industry go from bad to worse. The investors’ appetite for risk has diminished, causing loan guidelines to tighten to choking levels. Underwriters and managers are running scared, often making up rules and guidelines out of thin blue air as they go. This has caused us to fight for literally every loan we have closed.

Our business model is based mainly on the service we provide. As a mortgage broker we were dependent on wholesale lenders to fund the loans we were originating. When they made it almost impossible to close a loan, let alone on-time, we knew it was time for a major change.

We took it VERY seriously when wholesale lenders caused our service levels to decline because our word is our bond. To ensure we can still stand by that value we have been forced to make a drastic change. The future of the mortgage industry is large institutional lending. And since we can't beat them, we chose to join them. And we chose the best.....

Wells Fargo Home Mortgage currently enjoys the largest market share in the industry right now. That means roughly 1 in every 6 mortgages in the United States is serviced by Wells Fargo Bank. With that comes a strong commitment to customer satisfaction, a value Scott and I have always committed ourselves too.

No longer will we be forced to deal with wholesale lenders too scared to operate in today's lending environment. We are backed by one of the strongest banks in the nation with systems in place to get the job done. Finally we can return to closing a loan when we say we are.

As we move forward and learn the vast programs Wells Fargo has to offer, we will update you on how we can better serve you, our beloved clients. By working with Scott and me you have the benefit of working with a world class mortgage bank coupled with world class personal service. I'm excited for what the future has in store and I hope you do as well!!

Truth About Loan Modifications

Three years ago if I were to tell you about a loan modification, you would've stared at me as if I were speaking a foreign language. However, today we are surrounded by the term. Your neighbors, co-workers, family and friends are all talking about this new concept. Radio, television, and newspaper advertisements are everywhere. Loan Modification Companies are forming out of thin blue air to provide you a "service". Well I think something smells. These companies claim to have years of experience at renegotiating the terms of your mortgage with your lender. The first alarm for me is, how is it even possible to have "years of experience" given we are roughly two years into this market decline? They claim to have the ability to reduce your rate, principle and payment. If you're a struggling homeowner, this sounds like your prayers are being answered. But like any other crooked industry, they are simply praying on the weak.This bandwagon industry sprouted up faster than the dot com boom of the late 90's and early 2000's. These companies offer to act as your negotiator with your lender for a fee. Those fees are typically paid up front and can run from $2,000 to $8,000. Folks, I'm not making these numbers up, these are fees some of my clients have told me they paid. What I hate the most about these companies is they are charging a fee to do something you can do yourself. You can call the lender, you can tell them what your hardship is, and you can request a rate/principle/payment reduction. You can do everything they do, just without the crazy fees. I am hit with no less than 10 spam emails a day and visited by a door-to-door salesman at least once a month trying to recruit me into referring loan modification leads to their company. They offer huge commissions. Some upwards of $1,500. That is a lot of money for basically no work. However, my integrity and values keep me from exhorting money from people in bad situations. Now look. This post isn't a solicitation for a bunch stories on how a loan modification company helped you or someone you know. Obviously if they're in business they have had success. My point here is, they will have the same amount of success you will if your situation/hardship falls within the lender's guidelines. If you're situation doesn't meet those guidelines, it doesn't matter how many thousands of dollars you pay to a crooked company, your modification will not get approved! If you want to throw money away, I will put a bin in front of my office for you.Before I go further I must stand on the soap box for a minute. If you are earning 3-4 times your mortgage payment and have limited debt, you don't need a loan modification even if your buddy got one. Lenders are only willing to negotiate a loan modification if there is a chance you are going to default on your mortgage. They do it to save them money by avoiding the foreclosure process. They certainly don't do it because they're nice and want to save you money. They are taking huge losses and are simply trying to hold back the damn. My point, if you don't have a hardship, don't waste your time. A few months back a client told me he was advised by one of these crooked companies to go out and buy a car/boat/vacation/etc. to increase his debt load. Essentially he was being told to create his own hardship. I told him to run as far away from that joker as possible. The saddest part is the joker was partnered with a very well known and respected mortgage broker in Vacaville. Shame on him.Read that last paragraph again! Here is the best advise I will ever give. CREATING MORE DEBT WILL NOT HELP YOU GET OUT OF DEBT! I've heard a lot of crazy ideas in my day, but that takes the cake by far. Not only were they giving out horrible advice, they were going to charge $3-5K for it!If you need a loan modification because you have fallen on rough times, got stuck in a bad loan, or are facing a large payment increase, call your lender. Almost all lenders and loan servicing companies have loan modification departments. They may have different names, but they all do the same thing, mitigate loss. They are going to send you a package to complete. It is in-depth and will take a few hours to complete, but you can do it on your own. Be overly detailed and be sure to include all of your expenses, big and small. They add up, especially if you have kids. Remember, they are doing this to avoid having to start the foreclosure process. If you can't convince them of your hardship, then you won't get the modification approved.And one last thing. If you have lost your job and aren't receiving income, you will not get a loan modification. You have to prove your ability to pay after the modification is complete. If you can't afford the new payment, the lender will not bother with a modification. I know that sounds harsh, but sometimes reality is just that. We aren't out of the woods yet with this market decline. So if you are offerd the world by a loan modification company and it doesn't smell right, let me know. We can apply the sniff test together. I'll give you the honest truth, even if you don't like it. Just please don't be vicimized!