Tax Incentives And Loan Programs
Here are a few helpful links as well as information about tax incentives, deductions and housing loan programs that all home buyers, including first time home buyers, should keep in mind when embarking on a quest to purchase a home in Silicon Valley.
Please remember that some of the key tax deductions related to home ownership include:
- Mortgage interest and costs (including discount points)
- Cost of improvements
- First Time Home Buyers credit
- Energy Tax Credit
For a more comprehensive list of tax deductions, here is a useful link
The Tax Cuts and Jobs Act Tax Reform Bill (New in 2018)
All individual provisions of the new Tax Bill signed by President Trump are effective after December 31, 2017 for the 2018 tax filing year and will expire on December 31, 2025.
New measures pertaining to real estate taxation include:
Mortgage Interest Deduction
- The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
- Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
- The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
- Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
Deduction for State and Local Taxes
The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
Exclusion of Gain on Sale of a Principal Residence
The final bill retains current law. The amount of time a homeowner must live in their home to qualify for the capital gains exclusion remains 2 out of the past 5 years.
Federal Tax Credits for Consumer Energy Efficiency
As recently as 2016, Federal tax credits were available for energy efficiency improvements made to primary residences. The list of eligible upgrades included heating and cooling equipment, water heaters, windows, insulation and roofs.
In most cases, the energy efficiency requirements associated with the tax credit were met by choosing an ENERGY STAR certified model. Tax credit amounts ranged as high as $500 or even higher, depending on the type of equipment.
Today, the only federal tax credits for energy efficiency improvements that remain in effect are for solar energy systems (solar water heaters and solar panels). These federal tax credits remain in effect through December 2021.
For further information on solar energy systems, click here.
Government vs. Conventional Mortgages
Government mortgages such as FHA, VA, and USDA are backed and
insured by the U.S government, whereas conventional mortgages are insured by
private lenders. Qualifications are more lenient for government-backed loans,
and both types of mortgages can carry mortgage insurance which protects the
lender in case the borrower defaults on the loan. Mortgage insurance is
typically required for loans with less than 20% down.
FHA Mortgages are government-backed
loans through the Federal Housing Administration and approved lenders, banks,
and credit unions can offer them. These loans help borrowers with little to
no down payment, lower credit scores, and higher debt-to-income ratios. For
example, a first-time homebuyer can obtain a mortgage with as little as 3.5%
down. Mortgage insurance (MIP) is required on these loans. This insurance is
paid through the life of the loan unless a minimum 10% down payment is made.
In this case, the MIP can come off the loan after 11 years.
VA Mortgages are also insured
by the Federal Government through the Department of Veterans Affairs. These
mortgages are only available to our U.S. military which includes those who
are active duty for a required period of time, those who served in the armed
forces for a required period of time, or a spouse of a veteran who has died
in the line of duty. A COE (Certificate of Eligibility) is needed, as it
provides proof you qualify for a VA loan. With a VA loan, you can finance up
to 100% of the purchase price and not require a minimum credit score,
although a private lender could set a minimum credit score. Additionally, VA
loans don't charge mortgage insurance, however, an upfront funding fee may be
required unless you meet certain requirements.
USDA Mortgages are
government-insured through the Rural Development Guaranteed Housing Loan
Program. These mortgages help those with low to moderate income and are for
purchasing a home in rural or suburban eligible area. There are several types
of USDA loans and different qualification requirements that can vary between
them. These mortgages carry mortgage insurance, however for USDA loans, there
is no option to remove the insurance during the life of the loan.
Conventional Mortgages are originated and
serviced by private lenders, banks, and credit unions. Guidelines are not as
lenient as government-backed mortgages, rather they have more conservative
approval guidelines such as larger down payments, higher credit score
requirements, and lower debt-to-income ratios. Conventional mortgages will
carry mortgage insurance when needed. For example, a borrower could require
PMI (Private Mortgage Insurance) if they had little to no down payment. Source: Mortgage Market
Most Common Non Conventional Loans Use by Buyers in Silicon Valley
The Federal Housing Administration (FHA), a section of the US Department of Housing and Urban Development (HUD) can guarantee your loan on a single-family home or a condo up to $765,600. The increase will benefit many borrowers who are pushing up against the current limits because Fannie and Freddie loans are generally easier to get, a little cheaper than jumbo loans and may need only as little as 3.5% down.
As a side note, for 2022, the FHFA (Federal Housing Finance Administration) set the baseline conforming loan limit for 1 unit properties at $970,800 for Conventional financing (Fannie Mae & Freddie Mac) on 1 unit properties in Santa Clara County. As a reminder, a conforming home loan is one that meets, or “conforms” to certain qualifying guidelines (like loan amounts) set forth by Government Sponsored Entities (GSE’s) Freddie Mac and Fannie Mae. Also, the new limits are as follows: $1,053,000 for a duplex, $1,272,750for a Tri-plex and $1,581,750 for a Four-plex.
Currently, The Federal Housing Administration allows borrowers to cancel private mortgage insurance coverage, which is mandatory for loans contracted with less than 20% down payment, under two conditions:
- Borrowers’ loan-to-value ratio reached 78 percent of the original loan balance;
- Borrowers have made payments for five years.
Starting June 3, 2013, FHA will require borrowers to pay the premium as long as the loan is in force. In other words, the only way to stop paying PMI is for the borrower to refinance or otherwise pay off the loan.
On August 26, 2014, the Federal Housing Administration (FHA) issued its final rule to eliminate post-payment interest charges on FHA-insured single family mortgages. The policy change will prohibit mortgagees from charging borrowers interest on their home mortgages after a principal balance pay-off. The final rule will go into effect on January 21, 2015.
On January 9, 2017, FHA also changed its Annual Mortgage Insurance Premium (MIP) Cancellation Policy. This change will stop many homeowners from losing their right to cancel the annual MIP. You can read about these guidelines on the HUD portal.
You can also review all FHA loan programs on the FHA website.
Fannie Mae & Freddie Mac Loan Programs
On December 4, 2014 Fannie Mae and Freddie Mac, announced new loan programs that could make it easier for well-qualified, first-time and lower-income home buyers to purchase a home. Both Fannie and Freddie will back mortgages with down payments of as low as 3 percent.
Fannie Mae “My Community Mortgage,” program is available to first-time buyers, and eligible homeowners who wish to refinance their Fannie Mae-owned mortgage but don’t qualify under the Home Affordable Refinance Program (HARP). Fannie’s program is available since December 13th, 2014.
Freddie Mac “Home Possible Advantage” program is open to first-time buyers and other qualified borrowers with limited down payment savings. Freddie Mac’s program will begin on March 23rd, 2015.Both programs require private mortgage insurance.
California Housing Finance Agency (CalFHA)
If this is your first home purchase ever, the First Time Home Buyers Program from the California Housing Finance Agency (CalHFA) is for you. The California Housing Finance Agency offer low interest rate first mortgage programs and a variety of down payment assistance programs to eligible first-time homebuyers. Here are the top 3 programs applicable to San Jose and Silicon Valley in particular:
- The CalHFA FHA Mortgage Loan Program, which is applicable to properties located in federally designated targeted areas. This program is designed for low and moderate income home buyers. Borrowers do not need to be first time home buyers.
- My Home Assistance Program is a deferred payment option with a simple interest rate subordinate loan. Low to moderate income first-time home buyers can use this loan to make a down payment and/or closing cost assistance up to 3.5% of the sales price or appraised value, whichever is less.
- The CalFHA Affordable Housing Partnership Program (AHPP). CalHFA has partnered with over 300 localities (cities, counties, housing authorities, nonprofit entities and redevelopment agencies) that offer local down payment assistance. This program allows borrowers to combine a Cal HFA first mortgage loan with down payment and/or closing cost assistance from an AHPP.
- The CalPLUS FHA program is a first mortgage loan insured by the Federal Housing Administration. The interest rate on the CalPLUS FHA is fixed throughout the 30-year term. The CalPLUS FHA is combined with a CalHFA Zero Interest Program (ZIP), which is a deferred-payment junior loan of 3.5% of the first mortgage loan amount, for down payment assistance.
- CalHFA’s ZIP Extra Down Payment Assistance Program. This new program is designed to reduce the amount of money needed to close on the purchase of a home for buyers who may not yet have the funds for a large down payment, closing costs, or even an upfront mortgage insurance payment. The new program will include an additional $6,500 on top of the 3 percent down payment it currently offers as part of its CalPLUS Conventional with Zero Interest Program (ZIP). The ZIP program provides 3 percent of the loan amount at 0 percent interest on a fixed-rate, 30-year conventional mortgage. The additional $6,500, ZIP Extra, will also be provided at 0 percent interest.
First-Time Homebuyers Forgivable Equity Builder Loan. Home equity has proven to be one of the strongest ways for families to build and pass on intergenerational wealth and CalHFA is committed to improving equitable access to homeownership for all Californians. The Forgivable Equity Builder Loan gives first-time homebuyers a head start on this with immediate equity in their homes via a loan of up to 10% of the purchase price of the home. The loan is forgivable if the borrower continuously occupies the home as their primary residence for five years. this new program will allow first-time homebuyers to borrow a down payment at a 0% interest rate.
You can review all home buyers programs on the CalFHA website.
Fannie and Freddie Appraisal Alternatives
Consumers who are buying homes or refinancing existing mortgage loans may be eligible for an automated appraisal alternative. Borrowers may be able to realize savings in some instances of approximately $500, and closing times may be reduced by as many as seven to 10 days in cases where Freddie Mac's innovative new capability determines a traditional appraisal isn't needed. Freddie Mac's automated collateral evaluation (ACE) assesses the need for a traditional appraisal by leveraging proprietary models and using data from multiple listing services and public records as well as a wealth of historical home values to determine collateral risks.
If ACE determines that the estimated value of the home provided by the lender is acceptable, the lender may receive immediate representation and warranty relief related to the value, condition and marketability of the property upon delivery of the loan to Freddie Mac. ACE will be available for qualified home purchases beginning on Sept. 1, 2017; it has been available for qualified refinances since June 19, 2017.
Fannie Mae also updated its market-leading automated mortgage underwriting system to allow property inspection waiver (PIW) offers on some purchase transactions.
City Of San Jose Home Buyers Programs
Closer to us in Silicon Valley, you may want to check out programs available to home buyers in the city of San Jose, CA.
You can review all programs on the City of San Jose Department of Housing website
Housing Trust Silicon Valley
If you live in Silicon Valley and you are a first time home buyer with low to moderate income, you should check out the down payment programs offered by the Housing Trust of Silicon Valley which are as follows:
- Empower Homebuyers Santa Clara County:Empower Homebuyers is a loan for first-time homebuyers to help
them with the down payment. The loan can be for up to 17% of a home’s purchase
price – which means an additional 3% from a first-time homebuyer would reach a
down payment of 20%.No matter the amount borrowed, there
are no monthly payments or interest with an Empower Homebuyers loan. Instead,
when the loan matures, you decide to sell or you refinance your mortgage, you
repay the original amount of your loan plus a share of the appreciation of your
home.You will share your appreciation in
equal proportion to the amount you borrowed. This means if your loan was 17% of
the purchase price, you will share 17% of the appreciation and the rest of the
equity that builds up on your home over time is yours. For instance, if you buy
a house for $600,000 and use Empower to borrow 17% ($102,000) for the down
payment, and the home is later sold for $800,000, you would owe $136,000 –
$102,000 plus $34,000 (17% of the $200,000 appreciation).
- Homebuyer Empowerment Loan Program: HELP assists first time homebuyers with incomes
slightly higher than Empower Homebuyers SCC and other down payment assistance
programs by allowing a middle-income first-time homebuyers to borrow up to
10% of a home’s purchase price – which means an additional 10% from a
first-time homebuyer would reach a down payment of 20%.
No matter the amount borrowed, there
are no monthly payments or interest with a HELP loan. Instead, when the loan
matures, you decide to sell or you refinance your mortgage, you repay the
original amount of your loan plus a share of the appreciation of your home.You will share your appreciation in
equal proportion to the amount you borrowed. This means if your loan was 10% of
the purchase price, you will share 10% of the appreciation and the rest of the
equity that builds up on your home over time is yours. For instance, if you buy
a house for $600,000 and use HELP to borrow 10% ($60,000) for the down payment,
and the home is later sold for $800,000, you would owe $80,000 – $60,000 plus $20,000
(10% of the $200,000 appreciation).
Please note that I am Certified by the Santa Clara County to help you with any of these housing programs if you qualify.
How to Finance the Purchase of a Fixer Upper Home?
You've found the perfect house in the desired location you've
been waiting for and the price meets your budget. However, there's one catch –
the house will need a good number of repairs before you can live there. So,
what to do?
The good news is, there are several loan options to help you
finance those repairs whether you're a first-time homebuyer, an investor, or a
seasoned homeowner. Finding a renovation loan specialist who can guide you to
identify which type of loan will work best based on your qualifications and how
the process will work is a great place to start. Here are the most common renovations loans:
Fannie Mae HomeStyle® Renovation Loan:
This loan is a very cost-effective way to renovate as it
combines the cost of both the home and the renovation into one mortgage. It
will also allow financing up to 75% of the property's as-completed value which
is the homes' appraised value after the repairs or upgrades are completed.
Financing can be done with primary, second/vacation homes, and rental
properties. Click her for more information.
Freddie Mac CHOICERenovation® Mortgages:
These loans also allow financing improvements up to 75% of the
property's as-completed value. One of the bigger differentiators of this loan is it can allow
loan proceeds to be used to renovate or repair property damage caused by
natural disasters or to make improvements to prevent damage from a natural
disaster. Renovations can include retaining walls, storm barriers, or storm preventative
foundations. Click here for more information.
FHA 203(k) Loan:
FHA’s 203(k) Loan Program allows home owners to purchase a property including the cost of its rehabilitation. So, if you are not afraid of buying a fixer upper and/or a home in need of repairs but do not have the cash to pay for the renovation, do not forget to ask your loan officer about this program. Please note that real estate investors are no allowed to use the 203K Loan Program.
The FHA 203(k) loan has more flexible guidelines for the
borrower. But it also has stricter guidelines for the property. For example,
borrowers can have lower credit scores and higher debt-to-income ratios than conventional
renovation loans. With an FHA 203(k) loan, the property must be owner-occupied
or a primary residence. These loans also have an upfront mortgage insurance
premium to consider.
For more information read my blog: Rehabilitation Loans: The Under-Utilized Alternative to Home Buying