Cash Now… Loan Later Potential Pitfalls

The Main Pitfall of Cash Now, Loan Later Purchases

Some homebuyers opt to pay cash now and get their mortgage loan later. Cash purchases are more common now due to low inventory and multiple offers. See some reasons why HERE. Buyers who pay cash for a home but expect to get a loan later need to be aware of IRS rules. You can lose your mortgage interest rate deductions with this type of cash purchase. If a buyer intends to get a mortgage later, there are important things to be aware of.

Most lenders are not concerned about whether the homeowner wants to deduct the interest. They want to make a good loan that will be repaid. So if a buyer qualifies for the loan, they won’t worry about making sure it fits the mortgage loan deduction window. A new loan must be established within 90 days of the date of purchase to qualify for interest deductions.

Qualified mortgage interest, which is deductible, is based on the acquisition debt used to buy, build or improve a principal residence. The maximum mortgage amount of interest deduction is $750,000 of acquisition debt. When cash is paid for a property, the acquisition debt is zero. Zero acquisition debt means no mortgage interest deduction. After the window of opportunity, the only way to increase the acquisition debt is to make and finance improvements to the home.

Therefore, if you are considering paying cash for a home, it’s best to consult your tax advisor. Contact Sound Investments, Inc. Our owner is also a tax professional who can help explain the ramifications of this type of purchase.