Mortgage Tax Credit Recapture

Every State has a Federal Program available that offers First Time Home Buyers a Mortgage Tax Credit.  The Mortgage Tax Credit program is often referred to as the MCC, or Mortgage Credit Certificate.

In North Carolina, the program is offered through NCHFA, and in a 2017 survey, we found that most Mortgage Companies in North Carolina do not offer this First Time Home Buyer Program.  We DO offer the NC Housing Programs, and in fact, Steve is among the Top 25 Lenders for the program in the State and the Top loan officer in our area for using the program.

There are qualifications for the NCHFA Program, and there are pros and cons every home buyer should be aware of.  Specifically, the Mortgage Tax Credit Recapture, where in very rare circumstances, you might owe a fee back to the Government when you sell, or refinance your home.  If you meeet all of the requirements to pay a Recapture Fee back when you sell your home, it is typically not more than $2000, which is equal to the first year’s benefit.

How The Mortgage Tax Credit / MCC Works

The NC Mortgage Tax Credit, can save home buyers up to $2000 a year in federal taxes.  The Mortgage Credit Certificate, or MCC, works differently than a tax deduction.  A tax deduction reduces the portion of your income that is taxed, whereas the Mortgage Tax Credit is actually deducted from the final total of the taxes you might owe… making it much more favorable.  This is one reason we like the program so much!

The Mortgage tax credit increases the disposable income you have to pay for your housing, and a W4 is actually created and submitted during the mortgage process.  This increases your monthly take home pay, again, making it easier to afford your new home.

First Time Home Buyers can get a tax credit equal to 30% (50% for new construction) of the mortgage interest paid each year you own the home up to a maximum of $2000.  Again, this credit is available EVERY YEAR you own the house, this is not just a one year program – so it could save a home buyer $10,000 in a 5 year period!

How to Qualify For the Mortgage Tax Credit

First Time Home Buyers are eligible for this program, if they intend to occupy the home within 60 days of closing.  The Mortgage Tax credit is available with VA Loans, FHA Home Loans, USDA Home Loans and Conventional Loans.

There are maximum income limits that are based upon the Household Income for the County in which you are purchasing a home, and the number of people living in the home.  This is different from other NCHFA programs, in that ALL income for the family must be counted to see if you qualify – not just the people who are on the loan application.  For instance if a member of the household receives Social Security income, even if that person is not on the loan application – the Social Security Income is used to see if you exceed the Maximum Income for the County.

The Maximum Sales price for a New or Existing Home is $250,000.  So you must purchase a home under this limit, no matter what County you are buying in, to qualify for the program.

First Time Home Buyer is considered anyone who has not owned a PRIMARY residence, that they have lived in, for the past 3 years.  Veterans do have a one-time exception to this rule.  Folks who have been divorced, or who are renting out another home will qualify – as long as they have not lived in the property during the past 3 years.

Mortgage Tax Credit Recapture

If you use the Mortgage Tax Credit, and sell the home within 9 years, realize a profit on the sale of the home AND have a significant gain in household income can trigger a Mortgage Tax Credit Recapture.  In a situation where all three of those things occur, then a portion of the money that you received in credit from the Federal Government might be owed back.

In the last few years, less than 3% of home owners paying off a mortgage with a MCC had a Mortgage Tax Credit Recapture of any kind.

If a recapture is due, it is part of the homeowner’s Federal Income Tax liability for the year the home is sold.  According to NCHFA, “Recapture does not apply if disposition occurs due to the death of the mortgagor(s). A successor may be subject to recapture if the property is disposed of. Recapture does not apply to transfers to spouses and former spouses in which no gain or loss is recognized on Federal Taxes.”

Maximum Recapture Amount:
The federally subsidized amount which is 6.25% multiplied by the original principal amount of the mortgage, multiplied by the holding period percentage.

There is a sliding scale for the Mortgage Tax Credit Recapture, and it’s based upon the year that you sell the house, meaning it is a different percent for year 2, than year 5.  The percentage is based on the year in which you sell your home, after the loan closing,  according to the following table:

Year 1 – 20%  Year 2 – 40%  Year 3 – 60%  Year 4 – 80%
Year 5 – 100%
Year 6 – 80%  Year 7 – 60%  Year 8 – 40% Year 9- 20%
Year 10 through 30 – 0%

Mortgage Tax Credit Recapture Triggers for the Household Income Increase:

To see if you will have an adjustment due to household income increases, consider this.  The Household Income can not be more than the maximum for the County at the time you purchased the home.  In 2018, the maximum income for a family of 2 in Wake County is $80,000.  If you buy a house, with a family of 2, and 5 years from now you want to sell the home, and you now have children, (a family of 4) you must be under the 2014 household income for 3+ people, or $87,500.  In addition to that – you are allowed 5% increase each year.  So again, if you are selling the home in year five, in order to trigger the Mortgage Tax Credit Recapture, your annual income would need to be 25% higher than $87,500 – or $109,375.

This is an ADJUSTED Gross Income figure, as shown after all deductions on your Federal Tax Return – so not just a W-2 of $109,375, the actual income could be higher, and not trigger the Mortgage Tax Credit Recapture.

If you ARE over the maximum Household Income at the time of the sale, then you take the Adjusted Gross Income, subtract the maximum income, and divide that by 5000.  That gives us the percentage rate that you would be charged.

Again  – for the Mortgage Tax Credit Recapture to occur, you must have ALL THREE of the following:

• Sell your house prior to ninth anniversary date of closing and;
• Have significant increase in income and;
• Make a significant net gain in the sale of the home

In all situations, the actual recapture amount can not exceed 50% of the gain realized on the disposition, and in most of the examples shown here, it’s far less than $2000, or the credit you received in a one year period.

Bottom Line on Mortgage Tax Credits / MCC

There are Pros and Cons to using the Mortgage Tax Credit / MCC Program, and each first time home buyer has a unique set of circumstances.  We offer this program, many mortgage companies in our State don’t.  We are AGGRESSIVE about recommending folks consider the positive and negative impact given what they expect in the way of home ownership, getting married, selling the home – each situation is different, there really is no one size fits all mortgage program.

Our experience is that for the RIGHT First Time Home Buyers – this is a way for them to feel good about potentially stretching their budget a little.  You know you are comfortable with a rental payment of $675 a month, and you can’t really get your mind around making a house payment of $900.  We totally understand.  If we can show you how we can adjust the amount you are bring home, so that you are now bringing home $150 a month more – well, then it helps that first time home buyer feel more comfortable with the new house payment.

We are NOT trying to steer folks into a program that puts them over their head – we are simply trying to offer a program, and a benefit that is available to you… again, according to NCHFA, less than 3% of home owners paying off a mortgage in the last few years with a MCC – had a Mortgage Tax Credit Recapture of any kind.

We love helping First Time Home Buyers!  If you have questions about qualifying for your first Home Loan in NC , or you want us to help you look at your situation, and the possible Mortgage Tax Credit Recapture – Give us a call!  Steve and Eleanor Thorne 919 649 5058, or connect with us on Facebook!