02/25/2020
Is This a Good Time to Buy a Home?
Hello Sacramento,
With the interest rate in America that is sitting at an all-time low, have you wondered should I buy a home or still renting? Do I have enough for a down payment? I have a little bit of saving but have good income and credit score, can I buy a home? Rents in the greater Sacramento area are going up higher and higher, is my rent almost equal to a house payment? The rent money that I paid every month, can I get some of those back at year-end when I file my tax or lower my tax liability to the IRS?
My name is Edward Cheung and I am a Realtor. I am not a tax accountant, so I cannot give tax advice. Nowadays, Google is our best friend, anything you don’t know, you can google it. For safety-wise the knowledge we learned after we googled it, we should verify with our accountants once you decided to act on them. Let me give you some examples.
Property tax deduction: Here is what I found after googling it. The link below is for your reference.
“You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.”
https://www.nerdwallet.com/blog/taxes/property-tax-deduction/
Interests on the loan that you use to buy your home, you can get a deduction on it too.
“How the Mortgage Interest Deduction Works
Say you take out a $250,000 loan to purchase a $300,000 house. You use the house to secure the loan. The same year, you take out a $100,000 loan to fix up your summer cabin, valued at $150,000. You use the cabin to secure that loan. The combined total for your loans is less than the $750,000 limit. Under the new law, you can deduct the total interest you pay for these loans from your taxable income. “
For more details, you can read more on the above subject with this link below.
https://www.taxslayer.com/blog/can-i-deduct-the-mortgage-interest-deduction/
Owning a home as your primary residence is a long term investment. I owned a home for a few years and got some equity in it. Now I want to sell, what happens to the profits that I made? How much tax I have to pay to Uncle Sam?
Here is what I found out:
“Single taxpayers can now exclude up to $250,000 in profits on their home’s sale. Married couples who file jointly can exclude $500,000 from their taxable income. Age is not a factor and you do not have to buy a replacement home. After you take the exclusion, you could buy a less expensive home or even rent one. Better still, the IRS will let you use the exclusion each time you sell your primary residence .”
Here is the link for further reading: https://www.investopedia.com/articles/pf/06/homesaletax.asp
So we can see that owning your own home has a lot of advantages.
You got me thinking of buying a home, now what? Let’s get someone to lend us some money!
Let’s do some initial number crunching to see if we qualify to get a loan. Here are some keywords that I am going to throw at you: Principle, Interest, Tax, Insurance, and debt to income ratio. The principle is the loan amount that you borrow from the Lender. The interest is what the Lender will make in the life of the loan. The Tax is the property tax the State collected from you. Insurance is on the house in case of fire or other losses that you can get some protection against the loss. The debt to income ratio is how much total debt you have vs. income, it will be a percentage number that the bank/lender will use to access your monthly payment ability. Ok, let’s do the math, my numbers-crunching is not to be exactly like the Lender, just a guideline. The Lender is the one who has the final say on it.
Let’s say, I made $5,000 dollars per month. If the Lender determines my debt to income ratio to be 45%, (sometimes this number can be higher)
$5000×0.45=$2250
What is $2250 for? This is the amount that I can use to service all my debts on a monthly base. If I have a car loan, I need to deduct it from this amount. In other words, deducts all debt payments from this amount, what is left is being used to finance the home loan. I have a car payment of $300. Don’t have other debts. So my usable home loan payment will be $2250 – $300=$1950
Next, assuming I want to buy a home around $350,000. The property tax on this will $5000 per year, this number is a bit high for older homes, but let’s just use a higher number. So each month I need to put aside $420 (round up) for property tax. Insurance is $720/yr, monthly will be $60. Let’s deduct these numbers: $1,950-420-60=$1470 This is the amount left to make the loan payment of Principle and Interest on a monthly base.
Next, I am doing a 3% down payment to purchase this home at $350,000, so I am borrowing $340,000 from the Lender. My monthly payment is around $1700. A quick cheat-cheat for you, at the current interest rate, $100 will finance about $20,000 debt at 30 years term. So one can see I am short in money with my current debt (car loan) and potential home loan. I have $1470 but need $1700.
If I still want to buy a house, what should I do? 1. Make more money per month. 2. get rid of my car loan, once I paid off the car loan, I have more income for the home loan ($1470+300=1770). 3. Buy a less expensive house. In fact, this is the case for my daughter, she graduated from college and was making around $5,000 dollars per month. I bought her a new car in 2015, she wanted to trade-in for a BMW. I said to her, you do no such thing. A car is a depreciating asset. You want to drive the cheapest but reliable car and save up money to buy a house. The car I got you can run for a few more years. We are looking for a home to buy. So that is what she did, she bought a house 15 months ago, (she was at the job for about 6 months). I help with the down payment (5%), which can be 3%. She bought a house by herself for $345,000. She did not see that much tax advantage for 2018 but saw a huge difference for 2019. I have simplified the procedure and round-up the figures. In reality, when one uses such a low down payment to purchase a home, there is a figure that I did not factor in, PMI, private mortgage insurance which could be $100 ~200 per month.
If you are thinking of buying a home, the first step is to find a Lender and go through all the numbers to tell you what you can afford. Just like what we did above but in detail and exact. Your credit score is a factor as well. Speaking of a Lender, I have been working with one. She is currently offering two Grants, one is down payment assistance, the other is closing cost assistance. The down payment assistance is 3% of the purchasing price up to $10,000. The closing cost assistance is $7500. Both of these Grants can only be used on Primary Residence, meaning you have to live in it, not investment property. And it is address specific, meaning not all homes on the market will qualify for these grants. To find out the details call/text me at 650-215-8929, or DM me on Facebook. Don’t forget the Income can be one person or two or a household. If you are using more than one person to reach the income level, the person with the lowest score should 640.
Also, if you are a renter, you will not have any major tax reduction at all. So if your monthly rent is $1600 or above, we need to talk, ASAP. Maybe for a few hundred dollars more you can own a home. Remember, buying a home is a long term investment and base on stable financial conditions. The Grants are icing on the cake. So if you are thinking or ready to buy a home, or have some listing addresses in mind and want to check if the grants will work or not, call me 650-215-8929 or message me on Facebook.
