Are points paid "excessive"

[DLS]

A client received 1098 showing $48,500 in points paid on principal residence, box 2. They are listed on the settlement papers as points and an equivalent amount was credited from seller to her closing costs, seller paid points, should still qualify as deductible by the client...

My question is how do I determine if these points qualify for 461(g)(2) with particular reference to "amount of points paid does not exceed the amount generally charged in that area."

This amount is higher than most I see, but how do you know or determine 'the amount generally charged' in an area? And if I can only deduct the amount of points 'generally charged' for this year and amortize the rest, how do I calculate that?

The points were calculated as a percentage of the loan and taxpayer supplied money in excess of points charged. So I believe they qualify in all other ways.

Any help would be greatly appreciated!

[Bird Legs]

Excess Points

How large was the loan?
What percentage of the loan were they using? 2%? 1.5%?

[jainen]

Other factors

>>How large was the loan? What percentage of the loan were they using? 2%? 1.5%?<<

Other factors are the interest rate and the credit score. Since points are prepaid interest, a lender might ask for this upfront payment so the borrower can afford the monthly payments, especially for someone with a poor history of repayment.

[Joe Btfsplk]

Typographical error

Check the Client's HUD Settlement Statement. The 1098 probably has a typographical error and has an extra zero.

[GIMoe]

&quot;...amount of points paid does not exceed the amount generally charged in that area.&quot;

I haven't heard of a central repository or database of what the "generally accepted" points are for any given area. I think you would just base this on what you have seen, in your experience, to be a normal range of points charged in your area. Also, you can talk to mortgage lenders or loan officers to get a good feel of is a normally accepted practice. I would definetly check to make sure that it is not a typo, but as far as this rule goes, don't be overly concerned with the amount, for this particular rule, it is the number of actual points that is the deciding factor.

[Joe Btfsplk]

Price of the home

Are you doing Bill Gates' return?
A house that would justify that much in points would probably have to have a mortgage of over $ 2 million dollars.

[jainen]

on the line

>>A house that would justify that much in points <<

It is not necessarily out of line. A self-employed borrower with inconsistent cash flow and "trouble" documenting all income might well put 20% down on a million dollar house, buying the B-grade interest rate down as far as possible with 6 or 8 points. That's a tough price range for houses so the seller might agree to pay $50,000 to help the buyer finance it. It's no more than he's paying the real estate agent who is putting a lot less on the line.

[GIMoe]

Depends on the area

...A house that would justify that much in points would probably have to have a mortgage of over $ 2 million dollars.

5 points on a $970,000 mortgage is $48,500 -- depending on the geographical area, a $970,000 pricetag is not completely outrageous or even out of the 'norm'. 5 points in most areas is not far fetched either because a) Jumbo rates would apply and those are routinely higher than average, and b) as stated earlier by someone, a lot depends on the credit history of the loanee.

[DLS]

size of loan etc

(I'm a new user, so if I should be editing my post instead of replying, please let me know.)

Thank you for all of your help!

I had never seen this many points before either(!), and indeed, it is not a typo. The HUD papers match the 1098 amount.

I think it falls into the situation jainen described -
".. might well put 20% down on a million dollar house, buying the B-grade interest rate down as far as possible with 6 or 8 points. That's a tough price range for houses so the seller might agree to pay $50,000 to help the buyer finance it."

The amount is 6 points at 1% of loan - the points were reimbursed by seller. They did indeed put down a large amount (profit from previous home) and then used the points to buy down the loan and make the mortgage payments small enough so they could afford them.

I also called their mortgage broker and he did say that the market (northern California) is changing and that he has seen lenders allow reimbursed seller points in his area of up to 9%. He agreed that this was a change from the historical range of points in the past as the market changes.

It seems they should qualify to deduct all the points in the year paid then yes?
thanks again!