Is the interest paid on a home loan tax deductible?

Applying for that mortgage loan can be both an exciting and scary time. The latter is especially true for people looking to take out a home mortgage loan with bad credit. Nevertheless, it is possible for people to get a mortgage with bad credit and even get a home loan tax deduction at the end of each year on the interest paid.

Obtaining a Mortgage with Bad Credit

Since the "risk-based pricing" was first introduced by Fannie Mae and Freddie Mac back in 2007, an increasing role played in determining the application process of mortgages is a person's credit score. Both loan performance and credit scores were looked at by Fannie Mae and Freddie Mac which is how they came to the assumption that people with lower credit scores were more inclined to default on loans than people with higher scores.

The credit scores that are most commonly and widely used are generated through FICO, and are based off of the three major credit agency reports: Equifax, Experian and TransUnion. In fact, public affairs director of FICO, Craig Watts says, "FICO scores rank-order consumers by how likely they are to pay their credit obligations as agreed." When it comes to conventional mortgage lenders, people with credit scores of 740 or higher are able to qualify for better interest rates than people with lower scores.

Mortgage Interest Tax Deduction

In just about all cases, the interest you pay on mortgage loans can be deducted from your taxes, if you meet the requirements below:

• You file a 1040 form and itemize your Schedule A deductions.
• You are the owner of the loan and not making payments on the loan of someone else.
• Your payments are on a qualified home.

Deductions, of course, are government regulated, and the rules that apply are not always as easy to decipher as you might think. There are two different types of debt that are tax-deductible. One is "acquisition debt" which is a loan you take out for purchasing, building or improving your home. The other is "equity debt" which is a loan you take out from the equity of your home usually to gain cash.

Acquisition Debt

You can deduct the full amount of interest paid on this debt if the total amount equals $1 million or less if you are married and $500, 000 for single people or married filing separately.

Equity Debt

To deduct interest on this type of debt it must total $100, 000 or less if you are married and $50, 000 if you are filing separately or are single. It should also not be more than your home's fair market value minus any post October 13, 1987 mortgage debts or grandfathered debts.

Refinancing Tax Deduction

Many people are concerned that they will not be able to refinance with bad credit. They just assume that because they have bad credit, refinancing is not an option. Although it can be a challenge to obtain a loan from certain creditors when you have bad credit, it is not impossible. Your credit history is the biggest factor used to determine if you qualify for a loan and the type of interest rates you can get.

Recently, homeowners have been more encouraged to refinance their mortgage due to falling interest rates. This offers them the chance to get their monthly payments reduced or even have their loan term reduced. When you refinance your mortgage without adding on any more debt, any interest you pay on it is tax deductible. If you refinance simply to generate extra cash, or for reasons other than improving your home or for buying or building a new one, this falls under the "Equity Debt" terms.

Why Should You Check Your Credit Reports?

It is always a good idea to check your credit history through the main three credit agencies: Experian, Equifax and TransUnion since they each display different information in their reports. Your financial credibility is jeopardized by discrepancies and errors on your reports. You should report any errors you notice immediately and work with the credit bureaus and your creditors to get them resolved. There have been cases where significant errors have been on a person's credit report which harmed their good credit standing.

You will want your credit report to be blemish free and your credit score to be in the higher range to obtain a better mortgage loan rate. If not, you can definitely find companies that will work with people with bad credit. Once you obtain that home mortgage loan, you can then enjoy those home loan tax deductions on the interest rates you pay each year.

Joy Mali is an active blogger who is fond of writing articles on Bad Credit Loans to encourage people to manage and protect their credit. Follow her on Twitter to know more on interest paid on your mortgage tax deductible.