What is depreciation?

August 9, 2022 by Kevin Martini

If you are thinking of buying an investment property in Raleigh, North Carolina or anywhere in the U.S for that matter, a powerful word that you need to know is depreciation. In fact, in the real estate investment space, there are 3 thing you need to know about deprecation.

What is depreciation?

A tax deduction that real estate investors can take for the value of improvements on real estate investment property is called depreciation. According to the IRS Publication 946 (2021), depreciation “… is an allowance for the wear and tear, deterioration, or obsolescence of the property.” One may not depreciate the value of the land since depreciation is only applicable to the value of the improvements on the land. To deprecate a property, you must own it, it must be used in your business or as an income-producing activity, it must have a useable life and that useable life must be greater than 1-year.

How is depreciation calculated?

For illustration only, if an investment property is worth $500,000, and the land is worth $200,000, you can get a tax deduction for $300,000 when you buy the property. Now you cannot take the $300,000 tax deduction all at once in 1-year however you can spread it out over 27.5-years for residential properties.

How can you benefit from depreciation?

In the simplest form, deprecation allows you to take a ‘paper-loss’ when you purchase and/or own real estate rental property. This ‘paper-loss’ shelters part of your rental income from taxes. IMPORTANT: depreciation will eventually need to be paid back when you sell the real estate rental property through ‘depreciation recapture’ (NOTE: there is a way to defer ‘deprecation recapture’ by using a 1031 exchange.

This article has been written by Certified Mortgage Advisor and Raleigh mortgage broker Kevin Martini for informational purposes only and does not constitute legal, tax or financial advice. Please consult with a qualified tax advisor for specific advice pertaining to your situation. For more information on any of these items, please reference IRS Publication 946 and IRS Publication 527.

Contact Kevin Martini

5 Things That Impact Your Credit Score For Mortgage

July 17, 2022 by Kevin Martini

Your credit scores usually determine the price you pay for your money (mortgages, auto loans, auto leases, credit cards, business loans, personal loans, etc.). Perhaps the most significant part of your credit report is your credit score. For the purpose of mortgage, credit scores range from 350 to 850, with 850 being the best possible credit score, and 350 being the worst possible credit score.

Who Pulls Your Credit Will Determine Your Credit Score

The credit score you see may vary from what a lender sees and your credit score may vary between different debt being requested. This is because everyone has a unique credit score that represents their risk when applying for a new account based on what type of credit is being extended. Every industry has their own credit score model.

Different models are used to help a lender determine the credit risk for different type of debt. When securing an auto loan, the creditor is likely to use FICO (Fair Isaac Corporation) Auto Credit Score. When applying for a credit card, the creditor is likely using FICO 8 or VantageScore. When securing a mortgage, FICO Score 2, 4 and then 5 are used.

Credit Model & Scores Used When Applying For A Mortgage

There are three credit bureaus in the U.S. that collect information about you from your creditors. These bureaus then calculate a credit score based on that information. This means that you have three credit scores, one issued by each of the three credit bureaus:

Equifax (model: FICO Score 5 or Equifax Beacon 5)
Experian (model: FICO Score 2 or Experian/Fair Isaac Risk Model v2)
TransUnion (model: FICO Score 4 or TranUnion FICO Risk Score 04)

Mortgage lenders typically order a tri-merged credit report when you apply for a home loan. The tri-merged credit report gives the lender information from all three credit bureaus. The lender typically uses your middle credit score when they evaluate your loan application.

(NOTE: YES, the score models used are older versions and newer credit score models are available however Fannie Mae and Freddie Mac guidelines require these older versions be used.)

5 Factors That Determine Your Credit Score For Mortgage

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Payment History has a 35% Impact on Credit Score for Mortgage

The biggest predictor of future payment behavior is past payment performance. Payment history makes up more than 1/3rd of the credit score for the purpose of mortgage.

Amount Owed has a 30% Impact on Credit Score for Mortgage

It is not just about the amount of the balance, it is about the balance as it relate to available credit. ‘Amount Owed’ is really the proportion of debt balances compared to the total available credit for that account.

Length of Credit History has a 15% Impact on Credit Score for Mortgage

Established credit accounts with a good track record. Time between older accounts and newer accounts.

Credit Mix has a 10% Impact on Credit Score for Mortgage

A well-balanced mix of credit accounts such as revolving credit, installment loans and mortgage.

New Credit has a 10% Impact on Credit Score for Mortgage

Newly established credit accounts put pressure on credit score until account performance can be established.

65% of your credit score is your payment history and balance-to-limit ratio.
Logan Martini

martini mortgage group at pcl financial group

The Logan Martini Market Update (June 6, 2022)

June 6, 2022 by Kevin Martini

Raleigh mortgage broker and mortgage strategist, Logan Martini, shares what happened last week and what to expect this week in the Logan Martini Market Update (week ending June 10, 2022).

LAST WEEK IN THE REAL ESTATE & MORTGAGE MARKETS

Last week 2 important pieces of data were released; the Unemployment Rate held steady in May 2022 and home appreciation surged.

UNEMPLOYMENT RATE, what does it really show?

390,000 jobs were created in May and that was stronger than the 320,000 expectations however there were negative revisions to the data for previous months (e.g. March & April) which diluted the number some. It is important to know that the headline Unemployment Rate removes people who are not actively searching for a job and there were almost 6 million people that are not being counted who “want a job” but have not looked in the last four weeks. The U-6 all-in unemployment rate, which adds back all these individuals and is more indicative of the true unemployment rate, increased for the second month in a row, rising from 7% to 7.1%. This could be a signal on unemployment and a sign that things are slowing, and we may have seen the low in unemployment.

HOME PRICES are higher today than a year ago!

The Case-Shiller Home Price Index showed home prices rose 2.6% in March and 20.6% year-over-year. This annual reading is an increase from the 19.8% gain in the previous report. If this pace of monthly appreciation continues, and we are showing no reason why it would not, appreciation could be over 30% this year!

The Federal Housing Finance Agency (FHFA) also released their House Price Index. This report measures home price appreciation on single-family homes with conventional loan amounts, which means it most likely represents lower-priced homes. Home prices rose 1.5% in March and 19% year-over-year.

Up, up & up are rents according to the Apartment List’s National Rent Report which revealed that rents increased by 1.2% in May and 15.3% year-over-year.

THIS WEEK IN THE RALEIGH MORTGAGE MARKETS

The economic calendar is quiet this week, except for May’s consumer inflation report scheduled for release on Friday. The market is expecting year-over-year consumer inflation to come in at 8.3%, which would be consistent with April’s inflation rate.

There won’t be any speeches from Fed policymakers this week, due to their one-week “blackout” period before their monetary policy meeting. This may contribute to the uneasy silence and tension in the market this week. Are we in the calm before the storm?

On Friday, the calm may be disrupted if Friday’s inflation numbers come out above or below market expectations. At this point, the market is expecting the Fed to increase short-term interest rates by 0.5% at their monetary policy meeting next week. It will be interesting to see if the odds change toward a more aggressive stance after Friday’s inflation report.

The Martini Mortgage Group will not just be watching for the inflation report that will be released on Friday but will be closely watching the Wednesday’s10-year Note and Thursday 30-year Bond auctions for demand.

THE LOGAN MARTINI BOTTOM LINE

Be prepared for more volatility and remember, right now, real estate and the current mortgage rate environment remains an opportunity. From a historical perspective, home loan rates are still very low even with the upward movement in 2022. Mortgage Strategists with the Martini Mortgage Group are here to talk about what you have just read and available to help you on the path to buying you home. Contact the Martini Mortgage Group by dialing (919) 238-4934.

Logan Martini