2018 Tax Law Changes

Good news overall for real estate and mortgage pros in Georgia

Change is never easy and we can certainly debate the tax law reform on many levels but for our industry and specifically in Georgia for real estate we believe everything will be okay!

Here, let’s not try to provide a comprehensive analysis of the changes to our IRC but rather focus on those key areas which impact home buying and lending decisions.

Why?

Capital Gains Stay the same

One big concern and misunderstanding surrounded a major benefit to homeowner’s on under the tax reform in 2018 –

Previously an owner could exclude Capital Gains on their primary residence if they lived their 2 out of the last 5 years. There was talk and I was concerned they were going to make it 5 out of the last 8 years. While not catastrophic it would have done nothing but hurt our industry (even if it were a minimal impact).

For some this exclusion is a reason to move every 2-5 years. It would have more than doubled the minimum from 2 to 5 years resulting in fewer sales.
Note there was not change to the exclusion of up to $250,000 for individual and $500,000 for a married couple filing jointly.

Mortgage Interest goes down from $1,000,000 to $750,000 but…

We’re not San Diego, Seattle, Washington, Boston, NY etc. where the home prices for so many are well above the $750,000 mortgage limit. In the Atlanta metro counties, where the median price of a home is $300,000 or less in most zip codes, a $750,000 loan goes a long way for the average homebuyer.

Psychologically some higher end customers may change their buying habits but I doubt it. Are you really going to avoid buying that $1.2M home for example because your 80% loan of $960,000 leaves you unable to write off the last $210,000 of interest payment. Of course some might but most will recognize that the lower overall brackets leave them quite capable of making their dream home come true. Finally on this matter, keep in mind the limit was already $1M and there were still the wealthy who were not deterred.

One thing to keep in mind and do some research on is home equity lines and junior debt. It’s my understanding from our research that this type of debt may not allow for interest deduction. So for you loan officer who like to do the piggy-back financing, make 100% sure you are not hurting your borrowers.

Income taxes and property taxes will be the one area to really watch.

Georgia does have both a state income tax and property taxes as we all know. Compared to many states our taxes are low but with a $10,000 cap on these deductions, expect some of us to be disappointed how quickly we hit the limit. If there is any good news, the bump in the standard deductions and the lower tax rates should hopefully mean we don’t get pinched to badly. However, certain states with high tax brackets such as California 13.8% and Oregon 9.9% could really feel the effect. We all know that home values and property taxes are not low in these areas either.

Honorable mention item:

Moving expenses will generally no longer be deductible (though apparently there will be some exceptions for those in the military) if the new workplace is at least 50 miles away from the old home but I just can’t see people electing to be stuck in home far from a new job because they don’t want to pay for moving expenses in the event their employer won’t foot the bill.

So our industry (at least in Metro-Atlanta) it seems will dodge a bullet with changes to the Tax Code. Also, with the strength of the local and national economy, recognition of Atlanta as an attractive and desirable destination for employers to relocate to and those seeking employment, low interest rates still in place and finally reasonable compared to other big cities in the U.S. get ready to have your best year to date in ’18.

Source: https://www.nytimes.com/2017/12/16/your-money/tax-plan-changes.html
Not intended to substitute for consulting your tax accountant.

Understanding Your Loan: Additional Information Can Be Important

 

Page 4 of your Closing Disclosure is important. It is NOT just standardized form information that is identical for every loan.

Review these terms:

  • Assumption: can this loan be transferred to another person if you sell or transfer the property?
  • Demand: can the lender require early repayment of the loan?
  • Late Payments: what penalty, after what period, applies?
  • Negative Amortization: does this loan schedule or allow payments that do NOT fully cover the interest due, resulting in increased loan principal?
  • Partial Payments: what is THIS lender’s policy?

You should also review Escrow Account details to understand whether you will pay additional property costs via regular Escrow Account payments or handle them yourself directly.

Understanding Your Loan: Cash And Transaction Summaries

 

Page 3 of your Closing Disclosure will compare cash requirements from your Loan Estimate to your actual final charges. If “Did this change?” is “YES” notes for changed sections should be provided.

The bottom line final “Cash to Close” is the money you will need in-hand in three business days.

If your transaction has a Seller the summary table will show a line by line comparison of Borrower to Seller transaction details.

If there is no Seller you may see a Payoffs and Payments table instead.

Review the summary tables to understand the transaction and your financial commitments at loan consummation.

Understanding Your Loan: Closing Cost Details

 

Page 2 of your Closing Disclosure details specific closing costs.

Section A includes: Origination charges collected by the lender Origination fees paid to brokers, loan officers or other parties and Discount Points – prepaid interest. These figures should match your original Loan Estimate.

Section B covers services for which you could NOT shop. The total of these should be within 10% of the total from your Loan Estimate.

Section C covers services you could shop. If you chose providers from the lender’s written list, costs should be within 10% of Loan Estimate. The set of services you can shop may vary on different loans.

The Recording Fees in Section E should be within 10%; other costs in E, plus F, G and H, may vary from your Loan Estimate without tolerance limits.

This page will also break out the costs YOU will pay, before or at closing; the costs the Seller will pay, any costs paid by others and any credits from your Lender.

Understanding Your Loan: Closing Disclosure Page 1

 

The first page of your Closing Disclosure documents:

  • The Loan Amount – the total you will actually borrow
  • The Interest Rate – which does NOT include the fees factored into the APR on Page 5

If this loan has a penalty for pre-payment or includes a balloon payment Page 1 will summarize the terms.

Projected Payments will show the chief cost components – Principal & Interest, Mortgage Insurance and estimates of your Escrow Payments over the life of the loan. You may see different columns for different periods if changes in terms such as mortgage insurance change payment totals.

Closing Costs summarizes your loan closing expenses, and Cash To Close adds the additional amounts due to give you the cash balance you will need in 3 business days.

Your Rights And Rules For Closing Disclosures

 

The Closing Disclosure documents the actual terms of your loan transaction. You should receive it no later than 3 business days before consummation. It must be in writing – paper or digital.

If the loan terms or costs change prior to consummation, your lender must provide a corrected disclosure AND an additional 3-business-day waiting period until loan consummation.

Waiving the 3-day waiting period is only permitted in certain circumstances, and only when the waiting period would cause a bona fide personal financial emergency.

Understanding Loan Estimate Comparisons

 

Page 3 of your Loan Estimate includes measures to help you compare loans.

“In X Years” shows the total amount you will have paid in that time, and the dollar amount applied to your loan principal. The ratio between total paid and principal reduced may change over time.

The APR shows interest PLUS fees as an annual ratio – APR is the actual percentage this loan costs per year.

The TIP figure relates the interest you will pay over the life of the loan to the loan amount. For example – a TIP value of 25% on a $100,000 loan means you will pay $125,000 – $100K principal plus $25K interest – over the life of the loan.

Calculating Your Cash To Close

 

Page 2 of the Loan Estimate provides the current ESTIMATED cash to close. Some costs will stay the same between estimate and closing. Some will change.

  • A – Origination Charges – should match.
  • B – Can’t Shop – 10% Tolerance
  • C – Can Shop – no tolerance limit, BUT IF you select a provider from your lender’s list their actual cost should be no more than 10% greater than the estimate.
  • E – Recording Fees are also subject to 10% tolerance
  • F – Prepaids, G – Initial Escrow and H – Other, such as Owner’s Title may vary from the Loan Estimate without tolerance limits.

These estimates of closing costs plus loan details, Down Payment, Deposits Credits and Adjustments are used to calculate your estimated cash requirements when the loan finally closes. Consider the possible changes and tolerances when evaluating a loan decision.

Understanding Your Loan Estimate: Other Costs

 

Real estate transactions require taxes, certain pre-payments, and escrow funding.

Recording fees are charged by government agencies for keeping legal ownership records, while “transfer taxes” may be imposed by states, counties and municipalities on real estate ownership transfers.

Prepayments may include homeowner’s insurance premiums on the property mortgage insurance, if required property taxes for a period of months in advance, and prepaid interest, typically for the period from closing to the first mortgage payment.

Escrow funding may also be required against future annual charges for homeowners insurance, mortgage insurance and property taxes.

Title insurance on YOUR legal ownership – “Owner’s Title Policy” – may be designated as optional, which only indicates that it is not required by this creditor.

Some of these “Other Costs” may vary substantially between Loan Estimate and Closing Disclosure ask your lender about the tolerance rules or watch the video “Could My Loan Cost Exceed The Loan Estimate?”

Understanding Your Loan Estimate: Services You CAN Shop For

 

These costs are paid to outside parties and YOU are free to shop and compare providers for a variety of services. These might include pest inspection, or  a survey to verify property lines or a range of Title-related services.

Title services might include:

  • a Lender’s title policy, which protects their legal interest in their loan collateral- usually the property itself
  • settlement agent fees, paid to the individual or company responsible for facilitating the final transaction
  • Title Search, which clarifies and documents legal ownership of the property
  • a title insurance binder, which allows potential future use of the current title search results, conditions and exclusions for a short period to lower the cost of future title insurance.

If you select service providers from the list provided by the lender, their fees cannot change by more than 10% between the Loan Estimate and the final Loan Disclosure. If you select other providers the lender is not responsible for changes in those costs.