Life Lesson: Don’t Close On A House In December

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Good news: I found a house, put in an offer, and had it accepted.
Bad news: It took 2 months longer than expected to go to closing.

You may be asking yourself why this is bad news. I had 2 extra months to save up for the house and get my finances in order. How could this possibly be a bad thing? One word: Taxes. Allow me to explain.

Because I did not have quite enough money saved up to put down the full 3.5% of the purchase price for an FHA mortgage, as well as pay closing costs, I decided to pull some money out of one of my retirement accounts. What was the harm? I thought. I’ll have them take out a bit extra to cover the taxes, and all will be well. I might have to pay a bit extra come April 15th, but that’s hardly reason to panic. Besides, I’ll get some deduction for my first month’s mortgage interest, closing costs, PMI, and the like. It seemed like a great idea at the time.

Then, of course, reality set in, and it set in hard. Despite all my careful planning, and assurances from the bank that they could have the mortgage fully approved in sixty days, a few days before my scheduled closing I received word that there was going to be a delay because HUD (Housing and Urban Development) had decided to audit my loan. Not audit me, but the bank’s loan process. Seems they do this to about 10% of all FHA-backed loans since 2008. This made everyone at the bank turn into panicky little squirrels, running around desperately clawing for any and all information they could possibly request from me, up to and including not one, not two, but THREE appraisals for the house I wanted to buy (I only had to pay for the first one).

This caused the sale of the house to be delayed until after December 31st. In fact, it was delayed all the way until Valentine’s Day. But none of the delay past the end of December actually mattered, because up until then I could have put the money I took from my retirement account back in and wouldn’t have had to pay ANY additional tax, since the contribution would have completely offset the withdrawal. I might have had to pay a few fees to the company I have the account with, but tax-wise I would have been fine.

However, the bank decided that they weren’t going to send my loan package off to HUD to be audited until they felt they had all their ducks in a row, which of course required the aforementioned 3 appraisals and a good bit of back-and-forth between the bank’s underwriters and the appraisers they used. The worst part was that they couldn’t give me an accurate date for when they would actually have the loan approved. This mean that I had to continually re-schedule the closing date. Six times. Yes, you read that right. Six times I had to move the closing date.

The first time it happened, in December, we (my real estate agent and I) didn’t even receive any communication from the bank until the mortgage commitment date had come and gone. Then he called the bank and found out what happened. This continued through January and part of February, before the bank FINALLY informed us that the loan had been sent to HUD.

Or so we thought.

As it turns out, the loan had only been AUTHORIZED to be sent. It wasn’t actually sent for another week after that. This meant another delay to the closing date (this was #6). At this point in the process, the seller we were working with (who had been remarkably patient, largely because they had 2 other properties in similar situations) started to get upset. Neither their agent nor mine had EVER heard of a situation where 3 appraisals were asked for by the bank, and both made this known. Fortunately, once HUD had the loan package it was approved within 5 business days and we got the closing scheduled for Valentines Day. I signed a bunch of paperwork, wrote a check for just about $7,000, and took the keys to my new house.

Fast forward to last week, through just shy of two months’ worth of moving stuff, hauling furniture, and installing appliances. I sit down to do my taxes. Pulling together all of my paperwork, and dealing with my change in jobs (and increase in salary, for which I’m very thankful), my eyeballs bugged out of my skull when I realized how much money I would owe the federal government. I was going to have to pay, and pay dearly, for taking money out of a retirement account early.

Before I panicked too much, I did some quick math. Fortunately, I already had more than 90% of my tax liability covered, so there wouldn’t be any underpayment fees. At this point, I made a very tough decision: I filled out the paperwork to file for an extension on my taxes. I’m going to take the extra couple months to make sure I’ve covered all my bases as far as deductions, credits, etc. are concerned, as well as save up the money I need to pay the balance of my taxes. I’m also going to have to pay interest on the tax that I haven’t paid up until now, but if my math is right, that’s going to max out somewhere around $50 by the time I have to file in October (and I hope to file well before then!).

The lesson here is that if you’re going to be doing anything that can have an impact on your taxes when you buy your house, and by that I mean anything other than buying the house itself, put off your closing until after the start of the new tax year if at all possible. That way, if your closing is delayed, you won’t take the tax hit nearly as bad, since the deductions from your house and mortgage will help offset. Of course, the better plan is to just have enough cash saved up so that you don’t have to do anything that will affect your taxes. I’m going to remember that for next time.

All that said, I’m still glad I bought my house. It’s been a wonderful experience these last two months, and having a place that I can truly call my own is something I wouldn’t want to give up. Now I just need to get my workshop finished, brew some beer, build more furniture, and…

Well, you get the idea.

Skål!

 

 

Postscript and disclaimer: I’m not a tax professional. None of this is tax advice or legal advice. Don’t take it as such. Financial professionals are highly trained people, and well-worth taking the time and spending the money on if you’re going to make a big purchase like a house. My financial adviser warned me about taking money out early, and he was right. So make sure you get competent advice! (This means not getting your advice from an angry engineer on the internet, mmkay?)

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About Josh

I'm an engineer, brewer, vintner, gamer, hiker, biker, and many other "-ers" besides. I grew up in Connecticut, but now live and work in Delaware. This is where I put various ramblings and musings, as well as tasty recipes for beer. Yes, beer. I brew my own beer, wine, cider, mead, and other fun fermented beverages. It's fun, easy, inexpensive, and I love it. It's something I'd love to do professionally, but that's a plan for a future day. For now I work as a chemical engineer with a bunch of great people that I'm never going to talk about here. Have a great day, and good brewing to all!
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