Closing and Tax Benefits
Once your offer is accepted, you can arrange for the home inspection, which should be done by an independent, qualified professional, and either apply for a mortgage if you have not already done so or let your lender know you found a home if you were pre-approved. The lender will start to prepare for closing and may need additional documentation from you, such as proof of homeowners insurance. During this period, it is a good idea to periodically check in with the lender and make sure that they have everything they need. Otherwise, your closing may be delayed.
Occasionally, buyers who were pre-approved later get their loan denied. For example, you may be unable to purchase a particular house if the appraisal comes in too low. Also, your lender will likely check your credit report right before closing, and your loan may be denied if there have been major changes since you first applied, like additional debt or recent late payments. However, if there are no problems, your loan will get final approval, and the lender will be ready to pay out the mortgage funds.
About a day or so before closing, ideally after the seller has moved out, consider doing a final walkthrough of the property. In the walkthrough, you should make sure that the seller left everything he or she agreed to leave and that the property is in the same condition it was in before. This is the best time to bring up any problems, such as a stain on the carpet, since the seller has not yet gotten paid. Once closing passes, your options for getting the seller to do something are limited.
Closing is the day that the mortgage is finalized and the title of the house is transferred to you. In many states, closing is handled by the title company. If not, it may be handled by a closing company or attorney. You will need to bring photo identification and a cashier’s check for the amount you are paying for closing costs and the down payment. There will be a lot of paperwork to sign, but do not feel rushed. You have a right to review the documents at least 24 hours before closing. Make sure that you understand them. You may want to hire a real estate lawyer to accompany you to closing and explain what everything means. The documents you will be signing include the:
Mortgage note: The mortgage note is your promise to pay the lender according to the specified terms.
Mortgage or deed of trust: This gives the lender the right to the title of the home if you do not pay the mortgage.
HUD-1 Settlement Statement and Truth in Lending Statement: The HUD-1 Settlement Statement shows your closing costs, and the Truth in Lending Statement shows the amount you are financing, APR, and other loan terms. If you see any unexpected fees or the mortgage terms are vastly different from what you discussed, don’t just sign the documents – ask the lender to explain them.
After you get through the mountain of the paperwork, you will receive the keys to your new home. You are now a homeowner!
Tax benefits of homeownership
Your mortgage payment will probably be higher than your rent, but owning a home can provide a nice tax break. If you itemize your deductions on your income tax return, you can deduct some home-related costs, the most common ones being mortgage interest and property taxes. Since deductions lower your taxable income, your tax liability decreases. For example, if your marginal tax rate (the tax rate that is applied to the last dollar you earn) is 25%, paying $3,000 in property taxes and mortgage interest would save you $750 in income taxes. A tax professional or program can help you determine all of the deductions you are entitled to.
With a lower tax liability, you may be able to reduce the amount of taxes being withheld from your paychecks. (You can adjust your withholdings by filling out a new Form W-4, available on the IRS’s website.) If you keep your withholdings the same, you may get a big refund. When you get a refund, the IRS is giving you back money that was withheld from your paychecks, money you essentially loaned to them interest free for the year. By reducing your withholdings, you net income will increase, giving you extra money to pay down interest-charging debts or put it in a savings account, where you will earn interest. Of course, you should avoid decreasing your withholdings so much that you wind up owing the IRS at the end of the year. You may want to consult with a tax professional or use the withholding calculator available on the IRS’s website to help you determine how many exemptions you can claim on your W-4 form.