Finance, Mortgage, and Tax Considerations in Transactions
Finance and tax items test the numbers behind the deal: how much a buyer can borrow, what the payment includes, when disclosures must be delivered, and how the transaction is taxed.
Qualifying and structuring
- Loan-to-value = loan divided by value; 80 percent LTV conventionally avoids mortgage insurance.
- Debt-to-income: total monthly housing payment (principal, interest, taxes, insurance, association dues) plus recurring debts, divided by gross monthly income. Guideline ceilings cluster in the mid-30s to low-40s percent, and automated underwriting can stretch them.
- Amortization: payment = P x [i(1+i)^n] / [(1+i)^n - 1]. For adjustable loans know the initial, periodic and lifetime caps plus the index and margin.
- Seller concessions, buydowns, points as prepaid interest, and the APR, which folds fees into a rate.
Disclosure timing
A loan estimate is typically due within three business days of application; the closing disclosure at least three business days before consummation. Referral fees for settlement services are prohibited, and escrow account balances are capped.
Tax treatment
Commissions and closing costs generally add to basis on a purchase and reduce proceeds on a sale; for investment property they are often currently deductible. Depreciation lowers basis and is recaptured on sale. A like-kind exchange defers gain if replacement property is identified and acquired within the statutory windows. Many jurisdictions exclude part of the gain on a principal residence after ownership and use tests, and require withholding when the seller is a foreign person. Refer tax questions to a tax adviser.
Worked example
Gross monthly income is 8,000. Proposed payment including taxes, insurance and dues is 2,000; car and student loans total 600. Reasoning: 2,600 divided by 8,000 is a 32.5 percent back-end ratio, inside typical guidelines, while the front-end ratio is 25 percent. If the buyer adds a 450 car payment the ratio rises to 38.1 percent, often still approvable but tighter, and a low appraisal that raises LTV can add mortgage insurance and lift the payment further.
Traps
- Quoting a note rate as the APR, or omitting taxes and insurance from the payment.
- Treating pre-approval as a commitment to lend.
- Assuming a financing contingency survives the commitment deadline.