Closing fees can seem expensive when you buy a home. The good news is that many of them are tax deductible. For example, the VA funding fee is often tax deductible as long as you meet the general tax requirements. We cover these requirements below.
Eligibility for Writing off the Funding Fee
There are certain requirements you must meet in order to deduct your funding fee on your taxes. They are as follows:
- You must buy a home between January 1st and December 31st, 2017
- Your total household income can’t exceed $100,000
- If your total household income is higher than $100,000 but lower than $109,000, you may qualify for a reduced deduction
- You must live in the home as your primary residence
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If you meet the above requirements, you should be able to deduct the funding fee from your taxes. Your tax professional can help you determine if you qualify.
The Benefits of the Funding Fee
The funding fee might seem like another unnecessary expense. On the VA loan it adds 1% of the loan amount to your costs. On a $150,000 loan, this equals $1,500. Because you don’t have to put any money down on the home, though, it can be easier to afford. The VA also allows you to roll the fee into your loan amount if need be.
The funding fee does help you in many ways, which may not be obvious. First, you can secure a loan with no down payment. Despite the lack of need for a down payment, you also have loose underwriting guidelines. Lenders can provide loans for borrowers with high debt ratios and mediocre credit. There aren’t many other loans that offer these benefits.
The funding fee is the reason that you can get the loan. It helps the VA guarantee loans for lenders. This means the VA pays lenders back when they have a defaulted loan. The VA does pride themselves on their low default rate, though. They base their approvals on the amount of residual income borrowers have each month. Borrowers with enough money left over each month can comfortably afford their mortgage.
However, the VA does have to bail banks out of some loans. It’s impossible to prevent every loan from defaulting. Life happens and people default. If the VA didn’t guarantee the loans, lenders would have stricter overlays than they have now. This means many borrowers with low credit scores and high debt ratios wouldn’t get a VA loan.
A Tax Deductible Expense Makes the Loan More Affordable
Even if you pay the funding fee out of your own pocket at the closing, you’ll see the benefits at tax time. Because you can deduct the fee, you lower your tax liability. This means you owe fewer taxes. This puts more money in your pocket at the end of the year. If you think about it, it helped you become a homeowner rather than forcing you to rent.
Only your tax professional can tell you for certain if you qualify to write off the funding fee on your taxes. In most cases, it is only deductible during the year you purchased the home. If you don’t qualify to write it off during that year, you lose the deduction. Take advantage of your ability to write the fee off and enjoy your life as a homeowner!
