Miami Home Loan, and Element Funding, direct lending mortgage bank, added another money saving program to their offering. The Mortgage Credit Certificate gives a First Time Homebuyer, (1st Time Homebuyer) a way to increase their annual tax write off. Jim Carter, loan officer, reports on the details.
WHAT IS A MORTGAGE CREDIT CERTIFICATE (MCC)?
A MCC creates a non-refundable federal income tax credit and is issued to first time homebuyers in conjunction with their mortgage.
• A MCC allows a qualified homebuyer to write off a portion of the annual mortgage interest as a special tax credit, not to exceed $2,000, during each year that they occupy the home as their principal residence.
• The portion or amount of the tax credit is equal to the mortgage credit rate of 50% (Florida Housing’s rate) multiplied by the annual mortgage interest paid.
• This credit reduces the federal income taxes of the buyer and has the potential of saving the MCC holder thousands of dollars over the life of their mortgage loan.
“TAX CREDIT” VS. “TAX DEDUCTION”
• A “tax credit” entitles taxpayers to subtract the amount of the credit from their total federal income tax liability, receiving a dollar for dollar savings.
• A “tax deduction” is subtracted from the adjusted gross income before federal income taxes are computed. Therefore, with a deduction, only a percentage of the amount deducted is realized in savings.
2012 MORTGAGE CREDIT CERTIFICATE PROGRAM
The program administration and compliance will be handled by Florida Housing staff- not by eHousing or US Bank.
A MCC is an enhancement to YOUR first mortgage, not Florida Housing’s as in the Bond Program.
Program Period Expiration is December 31, 2014 or until funds have been fully utilized. However, Florida Housing has resources available in case additional MCC allocation is needed.
• MCC Credit Rate = 50% (.50 x amount of annual mortgage interest paid = Tax Credit Amount.
• Credit is capped at a maximum of $2,000 annually.
Homebuyer may not have owned a home as their primary residence in the last three years (First Time Homebuyer-some exceptions apply).
• Homebuyer’s household income and the purchase price must not exceed the maximum limits set by the Program.
• Homebuyer must complete homebuyer education through a HUD approved counseling agency. Online education is acceptable if provided by a HUD approved counseling agency.
• Homebuyer must occupy the home as their principal residence within 60 days of closing. • Homebuyer must apply for the MCC through a participating lender. • Homebuyer applies for the MCC at the same time he or she makes a formal application for a mortgage loan.
• Funds will be available on a first-come first served basis.
HOW CAN A HOMEBUYER USES THE MCC?
The borrower claims the tax credit with their annual tax return using IRS Form 8396.
• The credit may be claimed for the life of the loan as long as the home is their principal residence
• The borrowers may, if they choose, adjust their W-4s to reflect the anticipated credit
HOW DOES A LENDER USES THE MCC?
Following Agency and/or Investor guidelines, the anticipated credit may be used to help qualify the borrower for a loan. If the tax credit is $2,000, the monthly adjustment is an additional $166.67 per month in qualifying income or is used to lower the housing expense depending upon loan type.
ELIGIBLE LOAN TYPES Underwriting Options:
• Fannie Mae Conventional
• Freddie Mac Conventional
Eligible Loan Terms:
• All loan types must be 30 year fixed rate purchase money mortgage
• NO ARMs or Interest Only Loans
• All loans must be originated in accordance with agency guidelines
• Prevailing market rates—set by lending institution Cannot be used with bond financing
ELIGIBLE PROPERTY TYPES
• New or Existing Single Family Units
• Town homes
• Manufactured Homes – Must meet FHA Standards
PROPERTIES NOT ALLOWED
• Rental Homes
• Investment Properties
• Recreational, Vacation, or Second Homes
Must be borrower’s primary residence. Homebuyers must not use more than 15% of the residence in a trade or business, including child care.
IRS CODE REQUIREMENTS
FIRST TIME HOMEBUYER REQUIREMENT
Homebuyers using the program cannot have had a present ownership interest in any principal residence during the last three years. This will be determined by the following: • Past three years signed tax returns (2009, 2010 and 2011 tax returns are currently required). Review for mortgage interest deduction or any type of homeowner tax credit which may indicate homeownership.
IRS CODE REQUIREMENTS .Signed tax returns are required from all borrowers who will be on title as well as non-borrowing spouses.
• IRS transcripts will be accepted in lieu of the 1040 EZ, 1040 A, or 1040
• If a borrower was not required to file federal tax returns in a particular year(s), an IRS printout stating “No Record Found” must be provided or other confirmation issued by the IRS confirming borrower was not required to file a return for that year.
INCOME REQUIREMENTS. Definition of “Household Income” means all sources of revenue or income of the mortgagor (ormortgagors) and any other person 18 years of age orolder, who is expected to permanently reside in the home being financed. • All forms of income including but not limited to: overtime, bonus, Social Security Income, child support, alimony, seasonal/part-time jobs, self employment, interest and dividend income, and rental income.
IRS CODE REQUIREMENTS RECAPTURE TAX. Recapture Tax is a federal tax that some homeowners that utilize these programs may be required to pay from the net profit they receive from the sale of their homes. The homeowner pays recapture tax with their federal income tax for the year in which they sell their home. The maximum tax is the lesser of 6.25% of the original loan amount or 50% of the gain on the sale of the home. For Recapture Tax to apply, they must meet all of the following conditions:
• Sell the home within nine years of purchase
• Make a net profit on the home, after adjusting the value of the home for any improvements or repairs the homebuyers have made, and after deducting all costs of sale, including sales commission
• The homebuyers household income must have increased at least 5% each year, above the applicable AMI used to qualify borrower.
Fear of paying Recapture Tax should not stop a homebuyer from utilizing the programs because of the above. Also, if the homebuyer refinances their home at a later date to obtain a better interest rate, or to use the equity they have in their home, Recapture Tax is not triggered. There is no way to predict the exact recapture tax liability, if any, since it is based upon the situation when the home is sold. At any time it will depend on the homebuyer’s income, family size, and the amount of the net profit the homebuyer realizes from the sale of their home.
PROGRAM FEES AND EXPENSES
• MCC Issuance Fee: $500.00. Any party can pay the fee in the mortgage loan transaction, and it must be disclosed per RESPA guidelines. Florida Housing must be paid by a lender check or by a check from the title company or closing attorney with the closing package. Upon receipt of the fee and the required documentation, FHFC will issue an MCC to the borrower with a copy sent to the Lender
• Program Participation Fee: $750.00. This one time lender fee is paid by the Lender and submitted with the MCC Participation Agreement to FHFC.
WIN-WIN HOMEBUYER BENEFITS
• The MCC allows the homebuyer the benefit of a dollar-for-dollar reduction of their tax bill in the event income taxes are owed
• Any remaining mortgage interest can be used to reduce the amount of taxable income
• The MCC can be used to gross up income or qualifying ratios for borrower.
So, if you or, anyone you know, is looking to find a Miami Home Loan, or a South Florida Home Mortgage,to purchase their own first time home, or to refinance an existing property, and would like help in getting their best financing solution call me, Jim Carter at Element Funding, at 305-525-6742. Your Miami Home Mortgage expert!