It may make sense, but I want you to understand exactly how the tax aspects of real estate work.But first, here are some questions you should ask yourself before committing to buy:Is your job situation reasonably stable? In other words, is your healthy income likely to continue?Do you believe youu2019ll be in the area for an extended timeu2014at least four years?Is your present level of debt manageable?Will buying a home exhaust all your cash, or will you have some left over for emergencies after youu2019ve completed your purchase?Assuming that you answered yes to all those, you next step should be to determine what your price range is. There are two aspects to this: 1) How much the lender will allow you to borrow, and 2) How much of a payment are you willing to make? When figuring your monthly payment, add up the principal and interest payment, the property taxes (use 1.25% of the purchase price, divided by 12) and your 1/12 of your annual homeowneru2019s insurance premium. If the area where you might buy has a homeowneru2019s association, account for the monthly dues. If your down payment is less than 20%, figure mortgage insurance as well. More about that in a bit.The lender calculates a number called u201cdebt to income ratio,u201d or DTI. They arrive at this number by adding up the total house payment (including taxes, insurance and mortgage insurance, if any) and all other debt payment that has 10 months or more remaining. This is u201ctotal debt.u201d Dividing that number you your gross monthly income gives your DTI. For a conventional loanu2014one that ultimately sells to Fannie Mae or Freddie Mac, the maximum DTI will be 50% as of July 29 of this year (itu2019s currently 45%). For loans that do NOT sell to Fannie or Freddie, the maximum DTI is typically 43%.In your case, where your gross income is $210,000 per year (and we can count your bonus as income only if you have a track record of receiving it for at least two years), your income is $17,500 per month. For calculation purposes, Iu2019ll assume that your other debt payments (car loan, credit card minimums, student loans, etc.) amount to $1,000. In that case, you would technically qualify for a purchase of $1,280,000 with a down payment of 20%. Your monthly payment would be $6,525.Be aware that when your loan amount is above the conforming high-balance amount ($636,150 in the Bay Area), youu2019ll have to be able to show 6u20139 monthsu2025 cash reserves after closingu2014about $37,000-$55,000 in this case.If your home ownership goals are not quite so lofty, or if cash reserves are an impediment, youu2019d want to keep your loan to the conforming maximum. With a 20% down payment, your price would be $795,000, with a monthly payment of $4,079. You may simply decide that you have a maximum house payment that youu2019re comfortable making. That would drive your pricing decision.If you consider buying with less than a 10% down payment, youu2019d be limited to a loan amount of $1 million. That would give you a purchase price of $1.1 million and a monthly payment of about $6,300. When you put less than 20% down, the lender will require some form of mortgage insurance. This limits their risk on a loan that they consider to have higher risk than one where there is a larger down payment. For a 90% loan, expect mortgage insurance to cost about .5%-.7% of the loan amount, depending on your FICO score and the loan amount. The example that Iu2019ve just given uses u201clender-paid mortgage insurance,u201d where you simply pay a higher rate in exchange for a smaller down payment.On to the tax aspects. You are allowed to deduct the mortgage interest on a mortgage of up to $1 million. Youu2019ll list this on Schedule A of your tax return, along with property tax and any other deductions your tax person can come up with, such as state tax and charitable donations. If your loan is $1 million at 4.625%, youu2019ll pay about $46,000 in the first 12 months that you have the loan. In addition, if you bought the property for $1,150,000, youu2019ll have about $14,000 in property taxes to deduct as well (assuming you are accounting for a full year when you file).Buying real estate u201cbecause I need the tax write-offu201d is the wrong approach. I say this because the mortgage interest and property tax, while they are indeed deductible, are an actual out-of-pocket expense. If you deduct a total of $60,000 in mortgage interest and property tax, you will reduce the amount of money you have to pay state and federal income tax on. Compare this with taking the Standard Deduction of $12,600 (married filing jointly). Itemizing your deductions means that your taxable income will wind up being at least $47,600 less than if you took just the Standard Deduction. (I am disregarding state taxes and other write-offs for the purpose of this example). Youu2019ll pay tax on $47,600 less by writing off these two items.[Important disclaimer: I am not a licensed tax professional, just a humble loan officer and real estate broker. Please donu2019t construe anything I write here as tax advice. These are illustrations only. You should consult a duly credentialed professional for tax advice]With gross income of $210,000, Iu2019d ethat your marginal tax bracket is 28%. This means that youu2019ll pay 28% on income over the base amount of $153,100. If youu2019re able to increase your total deductions by $47,000, youu2019ll not only wind up in a lower marginal tax bracket (25%), but youu2019ll also be paying tax on a lower amount.For a back-of-the-envelope scribble, Iu2019d say your tax savings in this scenario will be around $13,000 a year. (Did I mention you should consult an actual tax person to get real, decision-driving numbers? Goodu2026just checking) Think of this as a sort of tax subsidy to encourage and support home ownership. In other words, if your monthly payment is $6,300, the reduction in federal income taxes (Iu2019m disregarding state taxes for simplicity) would be around $1,083 per month, for an effective monthly payment of $5,217.The best way to get the benefit of the deductions youu2019ll be able to claim is to increase the number of exemptions you claim on form W4, which you file with payroll. Since each exemption (dependent) is worth $4,050, youu2019d want to increase the number you claim by 11 (47,000 / 4,050 = 11.6). Doing this wonu2019t change the amount of tax you owe, it will change the amount withheld from your check each pay period. Waiting to file your taxes and getting a fat refund at the end of the year is literally making an interest-free loan to the IRS, then filling out their paperwork to get your money back. Not the best strategy.The housing market is very competitive, especially in the Bay Area. Weu2019re seeing prices increase by about 4%-5% each year, so the cost of waiting is high. If you think your situation is conducive to home ownership, youu2019d be well-advised to become a homeowner sooner, rather than lateru2014the home you can buy for $800,000 today is likely to cost $840,000 a year from today.I hope this is helpful.
