Other Requirements In Points
The following additional requirements must be met in regard to points:
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The transaction settlement statement (Form HUD-1) must clearly show the amounts incurred as points., For example, it should state “loan origination fee” or some other official designation.
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The points should be computed as a percentage of the loan principal.
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The loan can’t be more than the amount that can be treated as acquisition debt (generally $750,000 ($375,000 MFS)).
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The points can’t be paid in lieu of other payments that are normally stated separately (e.g., appraisal, title, and legal fees).
Example - Home Residence Point Deductions - Bob and Barbara Black bought a home for $170,000. To finance the transaction, they put down $30,000 cash and incurred a $140,000, 25-year loan. The lender charged 3 points ($4,200) as part of the deal; the contract called for the points to be financed. Thus, rather than a loan amount of $140,000, the Black’s actual loan principal is $144,200 ($140,000 plus $4,200).
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Result: Since the Blacks provided cash (the down payment) at least equal to the amount of points, they may currently deduct the $4,200 points charge. Of course, they must meet all the statutory requirements detailed above.
Special Note: Had the Blacks’ total itemized deductions not exceeded the standard deduction, they could opt to amortize the points rather than deduct them and thereby preserve a deduction for the future that would otherwise be lost.
VA and FHA Loans
Amounts paid in connection with a VA or an FHA loan that would not be allowed if paid in connection with a conventional loan are not deductible points - an example is the VA Funding Fee. However, for years before 2022, this fee may be deductible as a mortgage insurance premium, subject to the AGI limitations of that deduction (IRS Pub 936).