As of January 1, 2012, borrowers can no longer deduct their FHA mortgage insurance on their federal income tax returns. This tax deduction went quietly into the sunset on December 31, 2011. Since the Federal Housing Administration has increased mortgage insurance premiums since the 2007 recession, losing this tax deduction increases the cost of owning a home. Those taxpayers who use the standard deduction and do not itemize deductions are not affected.
The FHA offers home mortgage financing featuring low down payments and flexible approval guidelines. FHA mortgage programs offer both fixed and adjustable rates for up to 30-year loan terms. FHA does not make direct mortgage loans, but it insures financing made through FHA-approved lenders, which include banks, credit unions and mortgage companies. Borrowers pay an upfront insurance premium when buying a home and a monthly insurance premium, which is included in their monthly mortgage payment.
Low Down Payments
All FHA borrowers, many of which are first-time buyers, using low down payments to purchase homes no longer have mortgage insurance premium deductibility. While precise numbers are unavailable, according to the Los Angeles Times, many millions of home purchasers and homeowners lost this valuable tax deduction at the end of 2011. In addition to FHA loans, those borrowers with Veterans Administration and U.S. Department of Agriculture housing loans, some with zero down payments, also lost this tax write-off, as did people paying mortgage insurance on conventional loans.
The elimination of this tax deduction is a significant loss for many lower- and middle-income homeowners. The amount of borrower savings loss depends on the annual income and marginal federal tax bracket in which the homeowner falls when all other tax deductions and credits are taken. For example, low-income homeowners would have lesser dollars lost, because their tax bracket is lower than taxpayers with higher income. However, while their dollar losses may be less, the negative impact could be greater than on a higher-income homeowner.
Cost of Home Ownership
Along with the loss of the mortgage insurance deduction, Fannie Mae and Freddie Mac charge additional lender fees, which are passed through to borrowers by mortgage lenders. These fees, which began in April 2012, affect home purchasers getting conventional mortgages. These additional fees, one-tenth of 1 percent of the loan amount, combined with the lack of tax deductibility for mortgage insurance, increase the cost of home ownership for all borrowers. Since mortgage insurance is mandatory for all FHA borrowers, regardless of down payment size, their tax savings loss, over time, will be significant.