Mortgage Credit Certificate Tax Credit:
A Mortgage Credit Certificate (MCC) is a federal dollar for dollar tax credit that program participants may take advantage of. Several Cities and Counties offer the Mortgage Credit Certificate program to first time homebuyers – those who have never owned a home, or have not owned a home for the previous three years – who either meet the income criteria set for their local program, or are purchasing their home in a Federal designated census tract.
The tax credit will offset federal income tax owed, usually up to a maximum of $2,000 per year for the life of the loan. Homebuyer may then deduct any mortgage interest over and above their tax credit with any other qualifying itemized deductions. Parameters of the MCC program are set forth by the Local City/County, and usually include an application fee of $250-300 that is paid by the applicant. Income limits are established, usually between 80-120% of HUD median income for the County.
The potential first time homebuyer has to:
1. Decide if the MCC meets their needs
2. Select a participating lender
3. Call the lender and find out if they qualify for the MCC
4. The lender submits the paper work to Local City/County for the certificate
5. Once qualified, begin shopping for a new home
Once the home is purchased through the participating lender, a homebuyer has to:
6. Adjust their withholding on their W-4 form with their employer and
7. File an IRS 8396 form with their federal income tax return.
The following is an example of how the tax credit works:
Mike & Kelley Buyers qualify for a $120,000 mortgage loan for a 6% interest rate for 30 years. Local City/County issues a tax credit under the MCC program at a rate of 20%.
The amount of the tax credit is determined as follows:
• $120,000 x .06 = $7,200 (first year’s mortgage interest)
• .20 (tax credit rate) x $7,200 = $1,400 (tax credit amount)
• $1,400 / 12 = $120/month savings per month
The $120 monthly savings can be used to increase the homebuyer’s income or reduce the housing expense ratio for qualifying purposes. The residual mortgage interest for the year of $5,760 ($7,200 minus $1,440) can be taken as a regular itemized deduction. The homebuyer needs to adjust their W-4 with their employer to realize the benefit of the credit. For the loan in this example, monthly principal and interest is $719.46, and the MCC allows the homebuyer an additional $120 per month to put toward their mortgage payment. When the savings are applied to the mortgage payment, the tax credit for the first year reduces the interest rate from 6% to 4.38%.
As with most subsidized programs, there is a recapture provision that remains in place for 9 years, and the home must remain owner-occupied.
Purchase Assistance Loan - PAL:
Many States, Cities and Counties offer down payment assistance Loan programs to first time homebuyers. Each program participant establishes the criteria for their local area. Usually, these loans are for homebuyers earning up to 80% of the HUD median income for their County and family size. Most of these loans bear zero interest, are “silent seconds” meaning they require no monthly payments with the entire balance due when the home is transferred, sold, refinanced, or the primary mortgage is defaulted on.
These PAL programs are for first time homebuyers – those who have never owned a home, or have not owned a home for the previous three years – who meet the income criteria set for their local program, and will have less than $2,000-5,000 in liquid reserves after closing. Some programs require matching funds from the homebuyer.
The potential first time homebuyer has to:
1. Decide if the PAL meets their needs
2. Select a participating lender
3. Call the lender and find out if they qualify for the PAL
4. Begin shopping for a new home
5. Participating Lender submits PAL application and documentation
The primary first mortgage may be an FHA, VA, Conventional Fixed Rate Mortgage, and may allow a Bond program.
These Purchase Assistance Loans are not subsidized loans, and therefore contain no recapture provisions. They do require that the home be owner occupied for the life of the loan, and are usually for single-family residences, which may be a house, condo, townhome, or manufactured home on permanent foundation meeting State criteria (not in parks).
Guidelines and criteria may vary widely, so check with the Housing Authority for the area you are considering buying your home in.
Seller Paid Down Payment Assistance:
Seller Funded Down Payment Assistance programs are being eliminated as allowable sources of down payment. As of December, 2007, FHA will still accept AmeriDream and Nehemiah Seller Funded Down Payment Assistance programs as acceptable down payment sources, but only until February 28, 2008 for AmeriDream. Fannie Mae and Freddie Mac do not accept Seller Funded Down Payment Assistance.
Down payment assistance providers Nehemiah Corp. of America, of Sacramento, Calif., and AmeriDream Inc., of Gaithersburg, Md., sued the government Sept. 30 and Oct. 1, respectively. Last week, U.S. District Judge Paul Friedman granted a preliminary injunction barring the Department of Housing and Urban Development from enforcing the new rule until he rules on the AmeriDream case.
The Nehemiah Program provides gift funds for down payment and closing costs to qualified homebuyers using an eligible loan program, such as FHA, that allows gifts from charitable organizations. Gift Funds of 1% to 6% of the final contract sales price can be received, depending on the particular needs of the homebuyer.
AmeriDream’s Down Payment Gift program provides up to 10% in gift funds for down payment and closing costs to qualified homebuyers.
Temporary Subsidy Buydown:
Temporary subsidy buydown plans are a way to help homebuyers qualify with the mortgage payment lowered initially, with the bought down interest prepaid by the homebuyer or the seller. When a homebuyer opts for a buydown plan, they will get lower, more affordable mortgage payments with the stability of predictable payment increases over time.
Most homebuyers choose one of two temporary buydown plans, a Limited or an Extended buydown plan. The Extended plan allows the borrower to qualify at the initial (bought down) interest rate that can be up to 1.5 percentage points lower than the note rate. This rate is then increased gradually (0.5 percentage points each year—for up to three years), allowing the borrower to make higher payments as their income increases. The limited temporary subsidy buydown plan allows them to obtain an initial (bought down) interest rate up to 2 percentage points below the note rate, with a 1% rate increase each year for the next two years. Borrowers are qualified at the initial (bought down) interest rate plus 1%.
This is an excellent option for homebuyers who have the capacity for higher earnings within a few years of obtaining a mortgage.
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