Washington Housing Education Federal Income Tax Credit for Homebuyers Washington State’s Mortgage Credit Certificate (MCC) 2009 Program What is the MCC Program? Mortgage Credit Certificates (MCCs) can help some families realize the dream of home-ownership. An MCC creates an income tax deduction that reduces a household's federal income tax liability and allows the household to have more available income to make mortgage payments. It is not a mortgage. It’s designed to help you more easily afford your house payments by giving a tax credit that that puts extra cash in your pocket each month. It works by assuring that fewer tax dollars will be withheld from your regular pay-check, increasing your take-home pay. A qualified borrower who is awarded an MCC may take an annual credit against federal income taxes of twenty percent (20%) of the annual interest paid on the borrower's mortgage. The value of the MCC is taken into consideration by the mortgage lender in underwriting the loan and may be used to adjust the borrower's federal income tax withholding. This adjustment will result in an effective reduction in monthly housing costs, and therefore, an increased ability to afford a mortgage payment. What is the difference between a "tax credit" and a "tax deduction"? A "tax credit" entitles a taxpayer to subtract the amount of the credit from his/her total federal income taxes owed, allowing the taxpayer to receive a dollar-for-dollar savings. This is different from a "tax deduction" which is subtracted from the adjusted gross income before federal income taxes are computed. With a deduction, only a percentage of the amount deducted is realized in savings. The homebuyer may adjust his/her federal income tax withholding to receive the benefit from the credit on a monthly basis. In this case, the homebuyer will refile a W-4 form with his/her employer reflecting the MCC credit. By taking this action, the number of exemptions will increase, thus reducing the amount of taxes withheld and increasing the homebuyer’s disposable income. The homebuyer also has the option to wait until the end of the year and realize the tax credit savings in one lump sum when filing the federal income tax returns. Regardless of whether the homebuyer adjusts the W-4 form or not, the homebuyer will report the tax credit when filing future federal income tax returns. How do I make application? After attending a commission sponsored Home Buyer Education course you may apply for the MCC program. All applications are accepted on a first-come, first-served basis by a state-wide network of lenders. Your lender will establish all underwriting criteria, including interest rate, down payment requirement, term, fees, points, and closing costs. Your lender will submit your loan application and notify you as to whether your application is accepted. After an application has been made, the Participating Lender will arrange with the Program Administrator to reserve an MCC allocation in the amount of the proposed mortgage loan for the qualified applicant household. This commitment will reserve the MCC while the mortgage loan application is being processed by the Lender. It is strongly recommended that you contact a tax professional before applying for an MCC in order to determine the potential benefits an MCC may provide for your specific tax situation. Which lenders are participating? Bank of America | Cobalt Mortgage | Cornerstone Mortgage Company | Eagle Home Mortgage | Evergreen Home Loans | First Rate Mortgage | Golf Savings Bank | Guild Mortgage | HomeStreet Bank | Integra Pacific Mortgage | Metlife Home Loans | Mortgage Advisory Group | Prime Lending | Seattle Metropolitan Credit Union | Sierra Pacific Mortgage | Wallick & Volk | Wells Fargo Home Mortgage. A representative from one of these lenders will teach part of the required Home Buyer Education courses. What kinds of loans or loan types are accepted? MCCs are available with FHA, VA, Rural Development mortgages, fixed or adjustable rate conventional conforming (i.e., Fannie Mae or Freddie Mac saleable), The Washington State Housing Finance Commission’s House Key State Bond Program is not available for use with the MCC Program. MCCs can be used with conventional fixed rate loans, FHA and VA loans, and privately insured loans fully amortizing for terms of up to 30 years. The Program Administrator does not underwrite the loans. Participating Lenders will process the underlying mortgages using their standard procedures, taking into account the value of the MCC in qualifying borrowers, when necessary. What are the fees? At the time of closing a nonrefundable MCC fee is $650 will be collected. What are the program guidelines? The WSHFC states that the MCC eligibility requirements include: New Loans Only The MCC is available with new purchase loans only. Refinances are not accepted, unless you are replacing some type of short-term bridge financing with a term of 24 months or less. Income Limits Borrowers must not exceed these Maximum Annual Income Limits: Acquisition Cost Limits Borrowers must meet these property acquisition cost limits. Acquisition cost limits of a single-family residence must not exceed the following: See table to right. Eligible Properties An MCC can be used for both new properties (never previously occupied) and existing properties are eligible. Single-family, manufactured homes (permanently) affixed or on leased land), and homes located on Native American trust land, located in both Targeted Areas and Non-Targeted Areas. Check the Targeted Areas page to see if the property is in a Targeted Area. Note: Not all counties have Targeted Areas. The residence must become the principal residence of the borrower within 60 days of the date the financing is executed or incurred (except where rehabilitation of the home delays occupancy). Business Use Limits No more than 15% of the residence may be used for trade or business purposes. Owner Occupancy The MCC is valid for the life of the loan, so long as you remain the owner-occupant of the residence. Homebuyer Education You must complete a Commission sponsored Homebuyer Education Course providing you with the steps to buying your home. Recapture Tax A recapture tax may apply only in the event that – you sell your home in the first nine years, and - your income has increased significantly, and - you have a substantial gain on the sale. IRS Form 8828 explains how the tax is calculated. What happens to the tax deduction for mortgage interest when a homebuyer uses an MCC? When using the MCC tax credit rate, the homebuyer is still eligible to deduct the remaining 80% of the annual mortgage interest payment not claimed as a credit. For example, assume the homebuyer pays $8,200 for the first year in mortgage interest. With a 20% MCC, the homebuyer could take a credit of $1,640 (20% of $8,200) and a mortgage interest deduction of $6,560 (80% of $8,200). What happens if I refinance my loan? What happens to my current MCC? If you refinance your property, the MCC may be reissued if completed within one year of refinance and if you qualify under the program guidelines. The amount on the reissued MCC cannot exceed the outstanding balance of the mortgage prior to refinancing and the certificate credit rate cannot exceed the certificate credit rate specified in the existing certificate. Further restrictions apply. A $375.00 non-refundable application fee must be included in a reissuance request.