Mortgage Credit Certificate Program and Tax Reform

UPDATE TO THIS POST 1/21/2018:  Now that the final legislation has passed Congress, we received this notification from NC Housing Finance Agency:

Congress has formally passed tax reform legislation and the good news is the Mortgage Credit Certificate (MCC) program is retained with no changes. Please continue using the program!

[One nice thing about the MCC program that many people don’t realize is a home owner does not have to itemize their taxes to apply the potential benefit. The MCC credit goes directly on the IRS 1040 tax return (if applicable). Customers must have a tax liability to see the tax credit.]

Thank you to everyone who reached out on behalf of the MCC program. Our offices are closed December 25, 26, and 27th.

Sincerely,
North Carolina Housing Finance Agency

The proposed Federal Tax Reform Program, if left as it is drafted in H.R.1, will eliminate a program that helps more than half of our customers qualify to buy the home of their dreams.  We focus our business on First Time Home Buyers, and the proposed Tax Reforms from Congress that go into effect 1/1/2018 eliminates the Mortgage Credit Certificate Program (MCC) nationwide.  This program is often referred to by first time home buyers at Mortgage Tax Credits. In a Statement from the NC Housing Finance Agency they advised:

The current draft of the tax legislation (H.R.1) will impact the availability of affordable housing programs serving both home ownership and rental markets. Should the tax legislation pass as proposed, it will eliminate the ability of housing finance agencies to issue Mortgage Credit Certificates on loans after 12/31/2017…  As such, lenders using the MCC program are advised to have all loans closed no later than December 20 and MCC closing package uploaded to NCHFA no later than 12/24/2017.

Mortgage Credit Certificate Program and Tax Reform

First Time Home Buyers and Veterans currently benefit from the Mortgage Credit Certificate Program and tax reform eliminating the program will have an immediate impact on those we are qualifying.  Under the program, we can give buyers more than $160 a month in qualifying power.  If you were purchasing a home for $250,000 with a FHA mortgage, 3.5 down payment… and at an Interest Rate of 4.0% (or 4.45 APR) the P&I would be $1151.76.  With the MCC credit, for Qualifying purposes, we could reduce that to $985.76.  That’s Huge!

The Spirit of the program is for you to bring the maximum $166 a month home (it varies based upon your income and tax bracket) in reduced Federal Taxes, and use those funds towards your Housing Expense.  In its’ current form, it means I can qualify you, perhaps for a $260,000 home, even if you have $109,975 in Student Loan Debt.  In fact I did that for a Nurse this morning.  She’s buying her first home, FHA requires us to count 1% of the balance on each of her student loans that are not on a level payment plan… even though the Hospital will help her pay off a large portion of the debt after she’s worked there for 5 years.

With the debts, and her good credit, and the Mortgage Credit Certificate, she is right at the maximum purchase power of $260,000.  With out it… her maximum sales price is closer to $220,000.  Some would argue that a $220,000 house in today’s market doesn’t really compare to $260,000 house.  Once you understand that so many of the Millennial’s have student loan debt and need this benefit, It’s really sad to see this benefit go away.

The program was initially approved by Congress in 1984 as part of Ronald Reagan’s Tax Reform. It is a benefit that stays with the Home Owner for the entire time they live in the home as their primary residence.  The House and Senate version of the current Tax Reform Bills double the standard deduction, which sounds pretty good.  However, looking at it from the 30,000 feet up view, there are some problems.  Only about 24% of individuals benefit above and beyond the standard deduction by taking the Mortgage Deduction.  With the Standard deduction being doubled, only about 4% of individuals would benefit by taking the Mortgagee Deduction.

Essentially THIS new Tax Reform Bill, unlike that of President Reagan’s wipes out the Mortgage Deduction, and will hurt home ownership eligibility, especially for First Time Home Buyers…

Again, the Mortgage Credit Certificate (MCC program does not send a Home Buyer $166 a month.  It enables you to change your W4, so that you bring home more money to spend on Housing Expenses.

How the Mortgage Credit Certificate Program Works

If we assume a First Time Home Buyer has a $150,000 mortgage at 4.5% interest for a 30 year term. The interest on the loan for the first 12-months would be $6,700.50. If the Borrower has a MCC, the Home Buyer could claim a tax credit of 25% of the interest amount paid, or $1,675.13, in the first year. This credit would reduce the amount of federal income tax they would otherwise owe (assuming the tax liability after certain other credits is at least $1,675.13) when filing their federal tax return.

The applicant’s deduction for home mortgage interest on IRS Form 1040, Schedule A, would be $5025.37 ($6700.50 of the home mortgage interest credit paid, minus the $1675.13 credit amount).

“The credit taken cannot be greater than the home buyer’s annual federal income tax liability after deductions, personal exemptions and certain other credits. Under no circumstance can the annual mortgage tax credit taken be greater than $2,000.00. In any case, the amount of the mortgage credit will reduce the home buyer’s home mortgage interest deduction.”

Who Qualifies For the Mortgage Credit Certificate Program

Currently, anyone who has not owned a home, as a primary residence in the past 3 years can be qualified for the program.  There are income limits that vary by County, and the number of people in the household.  In Mecklenburg the Limit for a Household with 1-2 people is $70,000.  For a family with 3+ the MCC limit is $81,000.  For Guilford County The limits are $60,000 and $69,000.  In Wake County the Limits are $80,000 and $87,500.

The loan has to be a fixed rate, primary residence, but the loan does not currently have to be a NC Housing Loan for us to add a MCC.  The MCC can not be issued after you close on your home, meaning you must get your mortgage through one of the approved Lenders with NCHFA, to get the benefit.  The maximum sales price for the program in NC currently stands at $260,000.

With the new Republican Congressional Plan, this entire program goes away, and effectively, the Mortgage Deduction with it.  BOTTOM LINE:  if you want to qualify with a for home with the MCC program, APPLY NOW!  We must have the loan closed by December 20, 2017 to guarantee the program will be available.  Mortgage Credit Certificate Program and Tax Reform are very sensitive issues for us.  The program is currently in the House Version of Tax Reform, but not in the Senate Version – it could be repealed… but for that to happen, more people are going to need to let Congress know it’s an important issue!  Every Housing Industry Trade Group thinks this is going to be another blow for Housing, leading to a housing recession.

If you have questions about Mortgage Credit Certificate Program and Tax Reform, or you want to see how this might change the pre-qualification you received for a mortgage, please call Steve and Eleanor Thorne 919 649 5058.