Mortgage Credit Certificate Program
Manual Table of Contents
SECTION 1 INTRODUCTION TO THE MCC PROGRAM ......................................... 1.1 Forward ............................................................................................... 1.2 What is a Mortgage Credit Certificate? .................................................. 1.3 The Difference Between a "Tax Credit" and a "Tax Deduction" ............... 1.4 MCC and the Federal Income Tax Mortgage Interest Deduction ............ 1.5 How a Homebuyer Applies for a MCC ................................................... 1.6 How a Homebuyer Uses the MCC ......................................................... 1.7 When the MCC Credit Exceeds the Tax Liability ................................... 1.8 The MCC Recapture Tax ....................................................................... 1.9 Purchase Price and Income Limitations ................................................ 1.10 Other Program Requirements ............................................................... 1.11 Eligible Properties ............................................................................... 1.12 Targeted Census Tracts ........................................................................
1 1 1 2 2 3 4 4 4 4 5 5 5
SECTION 2 PROGRAM ADMINISTRATION AND PROCEDURES ............................ 5 2.1 Lender Eligibility .................................................................................. 6 2.2 The Steps of Loan Origination and MCC Application ............................ 7 2.3 Lender Underwriting and Verification Steps........................................ 10 2.4 Loan Closing ...................................................................................... 10 2.5 Cancellation and Commitment Expirations.......................................... 11 2.6 Delinquent Closing Documentation ..................................................... 12 2.7 Program Charges and Fees .................................................................. 13 2.8 Special Responsibilities of the Mortgage Broker ................................... 13 2.9 Revocations......................................................................................... 13 2.10 Transfer of MCCs for Mortgage Assumptions ....................................... 14 2.11 Transferring MCC Applications to Another Lender ............................... 14 2.12 Changing Properties During MCC Application Process ......................... 14 2.13 Administrator Post Audit and Reports ................................................. 14
SECTION 3 BORROWER, PURCHASE PRICE AND UNDERWRITING REQUIREMENTS ................................................................................ 3.1 Overview ............................................................................................. 3.2 Applicant Eligibility Requirements ....................................................... 3.3 Verification of First Time Buyer Status ................................................ 3.4 Verification regarding Occupancy of the Home as a "Principal Residence"........................................................................................... 3.5 Maximum Income Restrictions and Verification ................................... 3.6 Maximum Purchase Price Restrictions ................................................ 3.7 Penalties for Applicant Misrepresentation ............................................ 3.8 Mortgage Requirements....................................................................... 3.9 Lender Record Keeping and Federal Report Filing ................................ 3.10 Administrator Annual Record Keeping ................................................. 3.11 Recapture Tax .....................................................................................
18 18 18 19 19 20 20 20
SECTION 4 CHANGES PRIOR TO CLOSING ......................................................... 4.1 Changes in Current Income................................................................. 4.2 Changes in Marital Status .................................................................. 4.3 Change in Acquisition Cost ................................................................. 4.4 Changes in Loan Amount .................................................................... 4.5 Lender's Obligation to Notify Administrator of Material Changes ..........
23 23 23 23 24 24
APPENDIXES A. B. C. D. E.
DEFINITIONS ACQUISITION COSTS INCOME GUIDELINES RECAPTURE TAX NOTICE MOBILE HOME/ MANUFACTURED HOUSING
15 15 15 16
SECTION 1 INTRODUCTION TO THE MCC PROGRAM 1.1
Forward
The Mortgage Credit Certificate Program, authorized by Congress in the Deficit Reduction Act of 1984, is an alternative to mortgage revenue bond-backed financing as a means of providing financial assistance for the purchase of single-family housing. In 1985, the State of California adopted legislation authorizing local bond issuing agencies to make Mortgage Credit Certificates (MCCs) available in California. The County coordinated the establishment of the regional program described in this Manual, and holds the ultimate responsibility for the issuance of the program's mortgage credit certificates. The County has the responsibility of requesting allocations from the State as needed to keep the program adequately funded. Notwithstanding the County role, each participating jurisdiction has equal representation and authority in how the program is administered. Tables 1 and 2, which appear in this Manual immediately after the Table of Contents identify the MCC issuing authority, the administrator and the jurisdictions participating in this program. They also provide a convenient and thorough summary of the parameters of this MCC program. The body of this Manual often refers to the information in these Tables. Manual owners should check with the office of the Program Administrator to ensure that they have the most current version of Tables 1 and 2. References to the "Administrator" or to the "program office" in this Manual mean the Program Administrator named in Table 1, Affordable Housing Applications. Please see Appendix A for definitions of the terms used in this Manual. 1.2
What is a Mortgage Credit Certificate?
The MCC is a federal income tax credit. With a MCC, the qualified homebuyer becomes eligible to write off a portion of the annual interest paid on the mortgage as a special tax credit. The portion or amount of the credit is equal to the credit rate on the MCC (for example 15%) multiplied by the annual interest paid. This credit reduces the federal income taxes of the buyer, resulting in an increase in the buyer's net earnings. Increased buyer income results in increased buyer capacity to qualify for the mortgage loan. The MCC has the potential of saving the MCC holder several thousand dollars over the life of the loan. Please see Table 1 for the mortgage credit rate used in this program.
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1.3
The Difference Between a "Tax Credit" and a "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. The following example illustrates how a credit is considerably more valuable than a deduction. TABLE 3
Value of a Tax Credit vs. Tax Deduction tax credit tax deduction
Total Income Deductions Total Taxable Income
$35,000 (- 0 -) $35,000
$35,000 (2,000) $33,000
Federal Income Tax Liability Credit Taxes Paid
5,776 (2,000) $3,776
5,216 (- 0 -) $5,216
Table 3 shows that for the same dollar value, a $2,000 credit reduces federal income taxes paid by $1,440 more than the $2,000 deduction. ($5,216 minus $3,776 equals $1,440.) 1.4
MCC and the Federal Income Tax Mortgage Interest Deduction
A taxpayer receiving a MCC credit loses a portion of his/her normal deduction taken for interest paid on the mortgage loan. However, the homebuyer may continue to deduct the remainder of the annual mortgage interest payment not claimed as a credit. And although the interest deduction is reduced, the holder of the MCC still pays considerably less in taxes. See Table 4. Assume a taxpayer with a $30,000 annual income buys a home for $100,000 at an 8% interest rate. Interest paid the first year is approximately $8,000. A MCC tax credit of 15% of the interest paid would equal $1,200. (15% x $8,000 = $1,200). TABLE 4
Benefit Realized With a MCC
Annual Income
With MCC $30,000
Without MCC $30,000
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Personal Exemption Interest Deduction Taxable Earnings Tax from Table MCC Credit Tax
(-2,350) -6,400 $21,250
(-2,350) - 8,000 $19,650
$3,184 -1,600 $1,584
$2,944 -0$2,944
The same taxpayer owes $1,360 less with a MCC than without one ($2,944 - $1,584= $1,360). The MCC will reduce the amount of federal income taxes otherwise due to the federal government from the homebuyer; however, the IRS will not pay out more than should have been paid in. Therefore, the benefit to the home owner in any one year cannot exceed the amount of federal taxes owed for that year, after consideration of other credits and deductions. 1.5
How a Homebuyer Applies for a MCC
The homebuyer may obtain a MCC through any of the Participating Lenders. A list of the Lenders can be obtained from the Administrator. The homebuyer should apply for the MCC at the same time he/she makes a formal application for a mortgage loan. The buyer should have a purchase offer in hand and should be ready to supply credit information, employment data and other information to the Lender for both the mortgage and the MCC application. There is no allocation of MCCs by Lender. During the processing of the mortgage application, during escrow, the Lender submits a MCC application package to the Administrator on behalf of the buyer. Provided the buyer and property are eligible, the Administrator provides the Lender with a MCC Commitment which reserves a MCC for that purchase transaction. The MCC is issued to the buyer after the close of escrow. Since the MCC processing is concurrent with the loan processing, it should not extend past the length of escrow.
1.6
How a Homebuyer Uses the MCC
The homebuyer should consider adjusting his or her federal income tax withholding to receive the benefit from the credit on a monthly basis. The homebuyer may file a new W-4 form with his or her employer reflecting the MCC credit savings. By taking this
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action, the number of exemptions will increase, reducing the amount of taxes withheld and increasing the buyer's disposable net income. 1.7
When the MCC Credit Exceeds the Tax Liability
If the amount of MCC credit exceeds the MCC holder's tax liability reduced by any other personal credits for the tax year, the unused portion of the credit can be carried forward to the next three tax years or until used, whichever comes first. The homebuyer will have to keep track of the unused credit each year. The current year credit is applied first and then the oldest amount of unused credit applied next. 1.8
The MCC Recapture Tax
Buyers who receive a MCC may be subject to a recapture tax if they sell their residence within nine years. The tax, if any, will always be the lesser of: half the gain from the sale of the home, or a tax based on a somewhat complicated formula which takes into consideration: (1) the original principal amount of the home mortgage; (2) the number of complete years that pass before the home is sold; (3) the median family income for the buyer's area at the time he/she bought the home, and (4) the buyer's modified adjusted gross income at the time the home is sold. There are several conditions which can exempt the MCC holder from the recapture tax. These include: (1) a sale due to death or divorce, and (2) insufficient increase in the income of the seller (MCC holder) between the time of purchase and the time of sale. The homebuyer receives detailed information on the recapture tax from the Lender and is asked to sign a statement at time of application that he/she is aware of the tax. 1.9
Purchase Price and Income Limitations
Mortgage credit certificates will be made available to first time homebuyers in this program. Table 1 shows the current purchase price and income limitations for MCC Program participants. The Administrator will review documentation from the Lender in order to determine eligibility pertaining to these limitations.
1.10 Other Program Requirements Qualified Applicants must be first time homebuyers. The homebuyer cannot have had an ownership interest in a principal residence in the past three years preceding the date of the application. Also, the homebuyer must occupy the home as a principal residence,
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within 60 days after the close of escrow. In designated targeted areas, Applicants do not have to be first time homebuyers. 1.11 Eligible Properties and Financing A MCC can be used for either new or previously occupied single-family homes including single family detached homes, condominiums, half-plexes, or town-houses within the limits of the MCC Program. Although two-to-four-unit properties qualify as eligible structures for this program under IRS guidelines, some counties choose not to allow the purchase of more than two units using one MCC. Please contact the Administrator for the policy regarding this jurisdiction’s program. Multiple unit purchases are subject to the criteria set forth in Section 3.6 of this manual. See Table 1 for the properties and financing eligible for this program. The Administrator can answer questions about the eligibility of particular properties or types of financing. 1.12 Targeted Census Tracts Certain census tracts within the geographical limits of this MCC program have been designated "Targeted" by the Census Bureau as "Low Income". Applicants purchasing in these census tracts do not have to meet the first time homebuyer requirement. Also, the federally recommended income and purchase price maximums in targeted census tracts are higher, as the federal government wishes to encourage revitalization there. Of each MCC allocation received, 20% is set aside for use in Targeted Areas for one year. A Targeted Area is defined as either a census tract in which 70% or more of the households have an income which is 80% or less of the statewide median family income, or an area designated as an area of chronic economic distress. These areas are not subject to the "no prior home ownership" restriction. A list of census tracts that are this program's Targeted Areas appears in Table 2. SECTION 2 PROGRAM ADMINISTRATION AND PROCEDURES The purpose of this MCC Manual is to describe the program and set forth the role and requirements of the County, the MCC program, the Lenders and the mortgage loan borrower. This Manual contains a description of the program processing procedures and program administration. The borrower, purchase price, and mortgage underwriting requirements as set forth in State and Federal regulations are also described. Detailed instructions for preparing the MCC processing forms are in another document, the program Handbook. The Administrator may revise the program guidelines from time to time. Public notice will be given only for significant program changes.
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The County encourages eligible homebuyers, after receiving an explanation from a Participating Lender, to apply for a MCC. Participating Lenders are expected to be wellinformed about all the local, State, and Federal restrictions contained in this Manual so that both Applicants and Sellers alike are aware of these restrictions before the application is taken. The Lender shall reject those applications where the submitted information indicates that the Applicant does not qualify for the program. In general, eligible homebuyers apply for Mortgage Credit Certificates in connection with normal mortgage loan application procedures. The Mortgage Credit Certificate Application must be filed in conjunction with an application for a mortgage loan from one of the Lenders participating in the MCC program. The MCC processing procedures are designed to coincide with the standard mortgage loan processing and underwriting procedures that are in place at most mortgage lending institutions. Recognizing there are procedural variations among the participating Lenders, the procedures outlined here are meant to serve as guidelines with respect to the sequence of events. However, all the elements of the processing sequence outlined in this Manual must at some point be completed, regardless of sequence, by the Lender, the Administrator, the Applicant, and the Seller. 2.1
Lender Eligibility
For the MCC program, a "Lender" is any corporation licensed to originate and/or fund first mortgage loans in the State of California. All brokers, retail and wholesale Lenders who wish to participate in the MCC program in any way must be enrolled in the program. To enroll and maintain active status in the MCC program a Lender must sign a Quality in Participation Agreement and abide by its description of acceptable program participation including but not limited to: a. Designating a contact person: for each branch office participating in the MCC program; for the main business office; for the IRS report; and for Closing Phase Package correspondence, including fines. b.
Paying the annual enrollment fee referred to in Table 1.
c.
Requiring all lending personnel involved in the MCC program to attend the MCC training sessions.
d.
Providing the MCC Program Manual and the MCC Handbook to all MCC processors.
e.
Returning the Closing Phase package to the MCC program office within ten days after loan closing.
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f. 2.2
Cooperating with the MCC program in providing the best possible service to the County's first time homebuyers.
The Steps of Loan Origination and MCC Application
The following steps provide an in-depth step-by-step guide for a MCC, including Lender underwriting and verification. For a brief overview, please see the MCC Handbook. 1.
The Borrower applies for a mortgage loan from a Participating Lender or Broker. The Participating Lender or Broker can be a funding Lender, correspondent or mortgage broker. Any participating Lender or Broker can file the original application documents but only the Funding Lender receives the MCC Commitment and is named on the Mortgage Credit Certificate.
2.
The Lender discusses parameters of the MCC Program with the Borrower and determines eligibility for a Mortgage Credit Certificate. Lender informs Borrower of the non-refundable MCC application fee (see Table 1).
3.
The Lender determines that the Borrower is an eligible candidate for a MCC, based on income, purchase price, first-time homebuyer status, tax liability, and other factors. The Lender uses income and purchase price limitations published in Table 1 of this Manual. Lender requests three prior year's tax returns from the Borrower and prepares to have the Seller Affidavit forwarded with instructions to the Seller.
4.
Lender gives Applicant (Borrower) a MCC “Welcome Applicant Packet”, an information package that explains the program and contains consumer information. The package should include: (1) cover brochure of Welcome and general information; (2) MCC Example Sheet; (3) copy of Recapture Tax Notice #1 (Initial Notice to Mortgagor of Potential Recapture Tax signed by Applicant; (4) copy of Sample Recapture Tax Notice #2 (Information Regarding Potential Recapture Tax)
5.
Lender and Applicant review the Initial Notice to Mortgagor of Potential Recapture Tax (see Appendix D). Applicant signs and dates the notice. Lender includes the executed notice in Applicant's MCC application package.
6.
The Lender and Applicant together review, complete, and execute the four-page MCC Application and Affidavit. This document serves as the application and contains certifications in an affidavit format required by the MCC program regulations. These include:
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7.
a.
Certification that the residence will be used as a Principal Residence and that the MCC holder will notify the Lender, the MCC Program Administrator, and the County if the home ceases to be the Principal Residence of the MCC holder.
b.
Certification that the Applicant has not had ownership interest in a Principal Residence during the preceding 3-year period (not required for a targeted area.)
c.
Certification that the Purchase Price does not exceed the program Purchase Price limits.
d.
Certification that this is a new mortgage loan, as defined in the Internal Revenue Code. Additionally the loan must be secured by a first mortgage on the Principal Residence primary (first) loan property.
e.
Certification that the loan applied for does not constitute an assumable loan or a prohibited mortgage (mortgage financed through the sale of bonds, such as CHFA, Cal-Vet or a single family bond loan.)
f.
Certification that the Lender was selected by the Applicant in his or her sole discretion.
g.
Certification that the Applicant's gross annual income does not exceed permitted program income limits.
h.
Certification that no interest on the loan is being paid to a Related Person.
i.
Certification that the MCC cannot be transferred.
j.
Acknowledgement that any material misstatement or fraud is made under penalty of perjury.
k.
The Lender's certification must be signed by an agent of the Lender legally authorized to sign for the Lender.
Lender transmits to the Administrator a MCC Application Package containing: MCC Transmittal and Checklist; MCC Application; a check for the application fee made out to the County; Income Summary Worksheet with supporting documentation; Seller Affidavit; the first and last pages and any counter-offers of the Sales Agreement (signed by all parties); three prior years' tax return
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documentation (if applicable); Initial Notice to Mortgagor Regarding Potential Recapture Tax. Note: In all cases, the Lender must submit the MCC application and receive the MCC Commitment prior to the close of escrow. 8.
Administrator accepts and reviews the contents of the MCC Application package, inspects it for Lender's and Applicant's certification, and reviews it for completeness and accuracy. After the completed package is approved, the Administrator issues a MCC Commitment to the Lender designating a unique MCC reservation number for the Applicant, according to the purchase transaction described in the application package. By the MCC Commitment expiration date, the Lender must either: (1) submit the closing phase package; (2) submit written notice of MCC cancellation; or (3) request a 30-day extension. The MCC Commitment expiration date is the SOONER of: (1) the 10th calendar day after the close of Escrow, or (2) 120 days from the issuance of the MCC Commitment. The MCC Commitment is valid for 120 calendar days, beginning on the date the Applicant's income is verified by the Lender (the date Application Affidavit is signed by the Lender). The Lender should note that income must be re-verified and a 30 day extension requested if the period between original verification and the closing is longer than 120 days. Lender must submit request for extension to the County with a check for the extension fee (see Table 1).
9.
In addition to the MCC Commitment, the Administrator issues the Closing Affidavit which must be completed, dated and executed at the closing.
10.
The Administrator maintains a cumulative-to-date total of credit amounts reserved and the aggregate amount of MCCs to be issued, and notifies the Lenders in advance when funds are about to be depleted.
11.
Lender completes the remainder of the mortgage application process according to standard procedures.
2.3
Lender Underwriting and Verification Steps
1.
Lender performs standard mortgage loan underwriting procedures.
2.
Lender must take into consideration the effect of the MCC when determining the total amount of household income available for the monthly housing payment in order to determine the borrower's qualifications.
3.
In conjunction with Lender's regular verification process and under the Quality in Participation Agreement the Lender performs reasonable investigation that all
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MCC program requirements have been satisfied. Lender may verify this fact in any reasonable, efficient manner, as dictated by standard industry practices for processing mortgage loan applications. 4.
Lender verifies that the Applicant and the mortgage transaction comply with MCC Program requirements for income, purchase price, first-time-home-buyer status, location of residence, and other program terms.
2.4
Loan Closing
Once the funding Lender has received the MCC Commitment the Lender is allowed to proceed with the escrow closing. 1.
The Lender confirms that the MCC Commitment has not expired.
2.
Using the Closing Affidavit issued to the Lender with the MCC Commitment, the Lender completes the form, indicating the date of escrow closing, and declaring any material changes. Lender signs the affidavit and forwards it to escrow for execution by the homebuyer.
3.
Lender forwards loan documents and MCC Closing Affidavit to selected escrow officer with instructions for closing the loan and having the Applicant date and sign the Closing Affidavit and initial any changes to the informational data. The Escrow Officer forwards the executed Closing Affidavit back to Lender.
4.
No later than the tenth calendar day after the close of escrow, the Lender submits the Closing Package to the Administrator's office. The package includes: a.
Transmittal form, or a business card from the sender.
b.
Closing Affidavit with: 1) the date of closing: 2) any material changes initialed by the Lender and the Applicant(s); 3) Both date and signature of Lender representative, and 4) Both date and signature of Applicant(s) signed at the time of loan closing, and in no case more than 14 days before the date the loan is recorded.
c.
Any additional documentation required as a condition of the Commitment.
d.
Self addressed envelope, if Lender is requesting a copy of the MCC Certificate
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The Administrator reviews the Closing Package and checks the file to make sure all necessary documents have been submitted. Upon approval, the Administrator issues Mortgage Credit Certificate directly to the Applicant(s). The Applicant also receives the completed Recapture Tax Notice #2, a letter explaining how to use the MCC Certificate and a copy of the IRS Form 8396 to be filed with the Applicants' federal income tax returns. If the Lender has checked the request box on the Closing Affidavit, and included a self-addressed envelope, the Administrator will send a copy of the MCC certificate to the funding Lender. 5.
Lenders must adhere to the time frame of the MCC processing period, promptly notifying the Administrator in writing of any MCC cancellations and/or requests for MCC Commitment extensions.
Note: Regardless of the MCC Commitment expiration date, the closing package is due to the Administrator's office no later than ten calendar days after the close of escrow. Failure to meet this deadline will result in a fine levied against the Lender. Continuing problems could result in the Lender being expelled from the program. 2.5
Cancellation and Commitment Expirations
Once a Lender has obtained the MCC Commitment, the Lender is obligated to follow through to completion on the processing of that MCC Application. The following steps explain what to do in the case of cancellations and MCC Commitment expiration. 1.
Cancellations: In a case where a decision is made not to continue with the MCC Application, written notice must be sent to the Administrator prior to the expiration of the MCC Commitment. The notice must include the reason for the cancellation and be signed by both the Lender and the Applicant.
2.
Expiration of Commitment: Before the MCC Commitment has expired, the Lender must either: (1) submit the closing phase package; (2) submit a request for a 30day extension and check for $25; or (3) submit a notice of cancellation as described in number 1 above. The following action is to be taken by the Lender if the MCC Commitment expires: a.
If the loan has closed, and the closing took place within the 120 day Commitment period, Lender submits closing phase package and a check for the late closing fee (see Table 1).
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b.
If the loan has not closed, the Lender submits request for extension; new income verification documentation, estimated closing date, and check for late closing fee (see Table 1).
c.
If 120 days have passed since the MCC Commitment was issued, the Lender must submit new updated current income verification and check for late closing fee (see Table 1) (Transaction is subject to availability of MCCs at the time.)
d.
If the loan was canceled, the Lender submits cancellation notice as described in No.1 and check for the late fee (see Table 1).
In all cases, the expiration of the MCC Commitment without the required action by the Lender will result in the following (1) the Lender is placed on "Inactive Status," meaning the Lender may submit no new MCC applications until the problem is resolved; and (2) the Lender must pay the total late closing fee(s) due. Late fines are not to be passed on to the Applicant. Failure to comply may result in the Lender's removal from the program. 2.6
Delinquent Closing Documentation
If more than 30 days have passed since the MCC Commitment was issued, the program office may contact the funding lender requesting the status of the loan. If the Lender has failed to provide the MCC program office in a timely manner with the required MCC closing documentation (or a notice of loan cancellation or request for Commitment extension) the corresponding MCC application will automatically be considered delinquent. A written notice will be sent to the Lender allowing 30 days to remedy the situation. A copy will be sent to the applicant as notification that the MCC can not be issued until the Lender meets the program requirements. Such action may result in the Lender being fined and suspended from the program until the problem is remedied. 2.7 Program Charges and Fees Please see Table 1 for the charges and fees related to this program. Other than the non-refundable application fee, the Lender can only charge an Applicant applying for a MCC those reasonable fees as would be charged to a borrower applying for a mortgage not provided in connection with a MCC. Brokers are recognized as Lenders under this MCC program. They have the same rights, and pay the same enrollment fees as full service and wholesale funding lenders.
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2.8
Special Responsibilities of the Mortgage Broker
The Mortgage Broker originating the MCC application must name the Funding Lender who has agreed to accept the assignment of the loan. If at any time before the Escrow Closing the identity of the Funding Lender changes, the Broker is obligated to notify the MCC program office in writing immediately. Failure to do so may result in the Broker being suspended from the program. Similarly, failure to respond to requests from the MCC program office requesting information on a particular loan file may also result in suspension from the program. 2.9
Revocations
a.
Revocation of a MCC occurs when the residence for which the MCC was issued ceases to be the MCC holder's principal residence.
b.
Revocation will occur upon discovery by the Administrator or a Participating Lender of any material misstatement, whether negligent or fraudulent.
c.
Refinancing of the original loan/first mortgage results in a revocation and voiding of the MCC, unless the applicant applies for a Re-Issued MCC after the refinancing has closed. The Tax Credit may only be claimed for interest paid to the date of the recording of the refinancing, unless a Re-Issued MCC has been applied for and issued.
2.10 Transfer of MCCs for Mortgage Assumptions The MCC is not assumable. It is used only with original first mortgages. 2.11 Transferring MCC Applications to Another Lender If an Applicant has a pending MCC Application and decides to change from one Participating Lender to another, the MCC program will honor the original expiration date as long as all other conditions are unchanged. The transfer will be recognized and approved by the Administrator only after written notification is received from the originating Lender. 2.12 Changing Properties During MCC Application Process If an Applicant has a pending application and changes the property he/she is purchasing, the Lender must submit a new signed Sales Agreement and indicate by
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transmittal whether the mortgage amount has changed. If the Applicant has already been issued the MCC Commitment, the following documents should be revised and resubmitted to reflect the new property address and any change in mortgage amount: a. b. c.
MCC Application (first page amended and initialed by the Applicant) Sales Contract (first and last pages and any counter offers) Seller Affidavit
The MCC Commitment is re-printed with the original expiration date, provided that funding is available in the jurisdiction of the replacement property. 2.13 Administrator Post Audit and Reports The Administrator retains the express authority to perform annual random case post audits of Participating Lender records. The Administrator must make quarterly reports on IRS Form 8330, beginning with the quarter in which the Election is made. The report must include: a. Name, address, and TIN of the Issuer. b. Date of Election. c. The sum of the products of the certified indebtedness amount (the mortgage amount or the initial principal balance) and the MCC credit rate for each MCC issued.
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SECTION 3 3.1
BORROWER, PURCHASE PRICE AND UNDERWRITING REQUIREMENTS
Overview
Applicant eligibility requirements are set by both Federal and State law. Income and purchase price guidelines are modified, based on federal directives every 12-24 months. The Administrator will notify the Lenders when those changes take place, including the effective date of each change. For loans involving MCCs, the conventional underwriting standards should be modified to reflect a recognition of the MCC-derived mortgage interest credit in determining housing expense and indebtedness ratios. The secondary mortgage market and the mortgage insurance industry have established underwriting policies for MCC-linked loans. These are available as policy statements from the mortgage lending industry. The Lender will be required to submit certifications on which it will state that to the best of its knowledge, no material misstatements appear in the application and program documents. If the Lender becomes aware of misstatements, whether negligently or willfully made, it must notify the Administrator immediately, who will take all lawful actions to correct or mitigate the problem. The Lender should also be aware and inform the Applicant that criminal penalties are provided by federal and state law if a person makes a false statement or misrepresentation so as to obtain participation in this program. In an attempt to assure that all requirements are clear, an affidavit, which is part of the MCC Application is required to be executed by each Applicant and must be included in the MCC Application Package submitted. The MCC cannot be used with special bond-backed mortgages (e.g. CHFA, Cal Vet) or with loans with negative amortization. The MCC program imposes no other restrictions on the type of financing arrangement the Lender uses. The MCC Program allows the use of any standard mortgage instrument being generally used in the marketplace and places no restrictions on mortgage term, underwriting ratios, buyer credit status, etc. 3.2
Applicant Eligibility Requirements
There are three primary eligibility requirements: (1) First Time Homebuyer Status; (2) Income Restrictions; (3) Purchase Price Restrictions. In addition, the Applicant must occupy the acquired residential housing as a "Principal Residence." 3.3
Verification of First Time Buyer Status
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The Applicant applying for a MCC cannot have had an ownership interest in a Principal Residence at any time during the preceding three years ending on the date the mortgage is executed. (Exception: this requirement does not apply to acquisitions of units in target areas.) In the case of a married couple as Applicant, both parties must meet this requirement. The Lender must obtain from the Applicant an affidavit to the effect that the Applicant had no ownership interest in a Principal Residence at any time during the three year period prior to the date on which the mortgage for the MCC is executed. This must be verified by the Lender's examination of the Applicant's federal tax returns for the preceding three years, to determine whether the Applicant has claimed a deduction for mortgage interest or taxes on real property claimed as a "principal residence." Principal Residence includes a single-family house, condominium unit, manufactured home (as defined by federal law), share of a housing cooperative, or occupancy of a unit in a multifamily building owned by the Applicant. Ownership interest means ownership by any means, whether outright or partial, including property subject to a mortgage or other security interest. Ownership interest also means a fee simple ownership interest, joint ownership interest by joint tenancy, tenancy in common, or tenancy by the entirety, an ownership interest in trust, a life estate interest, and purchase by land contract. Any person who is living in a home as their primary residence and is listed on the Deed of Trust has ownership interest, even if they do not take a deduction for mortgage interest on their federal tax returns. For married couples, both spouses hold an ownership interest, even if only one is on the title. To demonstrate compliance with this requirement, Applicants must complete and sign the four-page MCC Application and Affidavit and the Closing Affidavit, and provide copies of their last three (3) years signed federal tax returns (or acceptable alternative exhibits see below). a.
b.
If the Applicant(s) can produce the signed 1040A, 1040EZ, or 1040 federal income tax returns for the past three years with all schedules which show no deductions for mortgage interest or real estate taxes for a Principal Residence, these forms shall be included in the MCC application package. The tax returns must be signed and dated in blue ink by the MCC Applicant(s). If the Applicant does not have copies of the actual tax returns submitted, the Applicant can go to the local IRS office to request a computer printout of their three most recent federal tax returns. The printout is usually provided free of charge, on a while-you-wait basis. Provided that the
16
printout shows that no mortgage interest deduction was taken, the printout can be submitted in lieu of the tax return copies. However, if the IRS has determined that an error was made on any of the three tax returns, they will not issue a printout; they will instead issue an IRS Letter 1722 . c.
If the Applicant is unable to obtain a computer printout as described above, the Applicant can request instead a "IRS Letter 1722" which summarizes pertinent data from the Applicant's tax returns for the three years. However the Applicant must also obtain on the letter 1722 a notation by the IRS representing that no mortgage interest deduction was taken during the three year period. This is especially crucial if the Applicant filed an IRS 1040 (long) form for one or more of the three years.
d.
If the Applicant can not locate copies of the actual tax returns submitted, and wants to obtain copies from the IRS, the Applicant can order copies by using IRS Form 4506. Copies will be sent to the Applicant in 6- 8 weeks. The IRS charges a fee for this service.
e.
In the event the Applicant was not obligated to file federal income tax returns for any of the preceding three (3) years, it will be necessary for the Lender to obtain from the Applicant a completed and signed Income Tax Affidavit which is required in place of (a), (b), or (c) above, along with the other program affidavits. This document is to be included in the application package, and must include an explanation of why the tax return was not required.
f.
When the MCC Commitment is issued during the period between January 1 and February 15 and the Applicant has not yet filed his/her federal income tax return for the preceding year with the IRS, the Applicant must sign the Income Tax Affidavit, stating that the Applicant is not entitled to claim deductions for taxes or interest on indebtedness with respect to property constituting his/her Principal Residence for the preceding calendar year. After February 15, the preceding year's tax return will be required. For example, after February 15, 1997, the completed 1996 return will be required. In addition to the Income Tax Affidavit the Applicant must submit documented proof of the Applicant's Residential Status (i.g. notarized letter from landlord, rent receipts, college transcript, entry visa into the United States, etc.) as well as other program affidavits.
g.
If the tax returns indicate the Applicant took a deduction for mortgage interest or real estate taxes on property claimed not to be the Principal Residence, documentation would be required to show proof of the
17
Applicant's rental status during that period (i.e. rent receipts, canceled checks). 3.4 Verification regarding Occupancy of the Home as a "Principal Residence" The Applicant must use the housing being purchased with the MCC-linked mortgage as a Principal Residence. The Lender must obtain from the Applicant, using the program affidavits, a statement of the Applicant's intent to use the residence as his/her Principal Residence within a reasonable time (60 days) after the MCC is issued. This affidavit further states that the MCC holder will notify the Lender and the Issuer of the MCC if the residence ceases to be his/her Principal Residence. 3.5
Maximum Income Restrictions and Verification
Qualified Applicants must have an annual gross household income that is within program guidelines. Under the Tax Reform Act enacted in October 1986, gross income is calculated by taking the Applicant's current gross monthly income at the time of the application and multiplying this by 12. Maximum income figures are based on a percentage of the median area income as determined by HUD, every 12-24 months. For the current maximum income figures see Table 1; for a general guide on income determination see Appendix C. Verification of the Applicant's income is performed by the Lender and the Administrator. For detailed instructions on calculations of the Applicants income see the MCC Handbook. 3.6
Maximum Purchase Price Restrictions
Maximum Purchase Price (or Acquisition Cost) figures are based on a percentage of the Average Area Purchase Price, as determined and updated by the IRS every 12-24 months. For current maximum single unit purchase price figures, see Table 1. All housing purchased under the MCC program falls under the designation "New Construction" or the designation "Previously Occupied." The pivotal factor is whether the home has been occupied. Therefore a "new" unit, whose construction was finished two months ago, then rented to a tenant, falls under the designation "Previously Occupied." 3.6.1 Two to Four Unit Properties If the subject property has two to four units and is in a non-targeted census tract, the Lender must submit documentation verifying that the structure was first occupied at least five years prior to the date of application. An appraisal or property profile of the subject property showing that it was more than five years old would normally suffice as verification. Two to four unit properties of any age, new or previously occupied, are eligible in targeted areas. To determine the maximum purchase price of a two to four unit property
18
multiply the single family purchase price limit (see Table 1) by the following factors: Purchase Price Limit Factors: a. 2 unit properties 1.126 b. 3 unit properties 1.363 c. 4 unit properties 1.585 3.7
Penalties for Applicant Misrepresentation
Strict penalties may be imposed on any Applicant making a material misstatement, misrepresentation or fraudulent act on documents submitted to obtain a MCC. Any person making a negligent material misstatement or misrepresentation in any affidavit or certification made in connection with the application for or the issuance of a MCC shall be subject to all applicable fines and penalties. 3.8
Mortgage Requirements
3.8.1 New Mortgage Requirements: A Mortgage Credit Certificate cannot be issued in conjunction with acquisition or replacement of an existing mortgage or land contract. The Lender and the Applicant, using the program affidavits, state that the mortgage being acquired in connection with the certificate will not be used to acquire or replace an existing mortgage or land contract. 3.8.2 Prohibited Mortgages: (a) Second mortgages. Only first mortgages qualify for this program; (b) mortgages funded with a qualified mortgage bond or a qualified veteran's mortgage bond are not eligible. The Lender and Applicant, using the program affidavits, state that no portion of the financing for acquisition of the residence is provided from a qualified mortgage or veteran's bond; (c) loans with certain or possible negative amortization. 3.8.3 No Interest Paid to Related Persons: No interest on the mortgage (or certified indebtedness) amount may be paid to a person who is a "Related Person," as that term is defined under the Internal Revenue Code and applicable regulations. The Lender must obtain from the Applicant, using the program affidavits, a statement to the effect that no Related Person has or is expected to have, an interest as a creditor in the certified indebtedness amount. 3.9
Lender Record Keeping and Federal Report Filing
1.
The funding Lender must file an annual report, using IRS Form 8329. As a courtesy, the Administrator will mail Lender a list of all MCCs funded by Lender for verification. (Lenders who use the MCC processing software will find that the software prepares the IRS report automatically.)
19
2.
For six years, the Lender must retain: a.
Name, mailing address, and TIN (social security number or tax identification number) of the MCC holder.
b.
Name, mailing address, and TIN of the issuer (See Table 1).
c.
Date of loan (date of issuance); certified indebtedness (mortgage) amount; and credit rate of the MCC certificate.
3.10 Administrator Annual Record Keeping The Administrator shall make an annual report for each year beginning July 1 and ending June 30. The report must include: a.
Number of Mortgage Credit Certificates by Income and Acquisition Cost;
b.
Volume of Mortgage Credit Certificates by Income and Acquisition Cost;
c.
Mortgage Credit Certificates Rehabilitation Loans.
for
qualified
Home
Improvement
and
3.11 Recapture Tax If a MCC holder sells or otherwise disposes of the home during the nine years after the purchase of the home, in conjunction with which the buyer receives a MCC, all or part of the MCC benefit may be "recaptured" by the federal government. The recapture is accomplished by an increase in the homeowner's federal income tax for the year in which the home was sold. The recapture only applies, however, if the home is sold again and the home owner's income has increased above specific levels. 3.11.1
Facts about the Recapture Tax
1.
The tax is payable in the year the MCC holder sells his/her home.
2.
Exceptions to the Recapture Tax (i.e. no recapture tax is due if ) a.
home is disposed of at a loss;
b.
home is disposed of due to home owner's death;
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c.
home is disposed of later than nine years after close of mortgage loan;
d.
home is transferred either to home owner's spouse or former spouse due to divorce and home owner has no gain or loss included in home under 1041 of the Internal Revenue Code; or
e.
Home owner's Modified Adjusted Gross Income is less than the adjusted Qualified Income in the taxable year in which the house was sold.
"Modified Adjusted Gross Income" is the adjusted income shown on the home owner's federal income tax return for the year in which the Residence is sold or transferred plus any interest received or accrued which is excluded from gross income received during that year, minus the amount of gain from the sale of the Residence including gross income on home owner's federal income tax return for that year. 3.
Maximum Recapture Tax is the lesser of: a.
6.25% of the largest principle amount of the mortgage loan and is the "Federally subsidized amount" with respect to the loan;
b.
50% of the gain on the sale of the home, regardless of whether that gain must be included in the home owner's income for federal income tax purposes; or
c.
the calculated Recapture Amount.
Procedures 1.
The Initial Notice of Potential Recapture Tax must accompany the application phase documents before the MCC Commitment will be issued.
2.
The Notice to Mortgagor of Maximum Recapture Tax is issued by the Administrator and sent to the homebuyer with the Mortgage Credit Certificate after the close of escrow.
3.
The Recapture Tax form is a complicated form which has on it specific instructions for completing it. The actual recapture tax, if any, can only be
21
calculated when the home is sold, because both the sales price and the home owner's income at the time of sale must be known. For an in-depth explanation of the Recapture Tax, please see Appendix D.
22
SECTION 4 4.1
CHANGES PRIOR TO CLOSING
Changes in Current Income
The eligibility of the Applicant for a MCC is based upon the Applicant's current income. The MCC Program will issue the MCC Commitment based on facts pertaining to income as they are determined as of the date the MCC Commitment is issued. The income verified for the MCC Commitment is valid as long as the loan closes within 120 days after the financial information was originally submitted and there are no additional sources of income which should have been reported and were not. Upward changes in income sources already reported (i.e. raises on the job) will not affect the validity of a MCC Commitment as long as the loan closes within 120 days from the time the MCC Commitment was issued. If the loan does not close within 120 days, a new application for a MCC must be submitted and current income verified. 4.2
Changes in Marital Status
If the Applicant gets married after issuance of the MCC Commitment and prior to closing, the spouse must satisfy the prior home ownership requirements contained in the MCC Application and Affidavit and the Closing Affidavit, and the Lender must notify the MCC program Administrator. The Administrator will re-calculate the Applicant's household income to include the new spouse's current income. If the re-calculated total household income exceeds the applicable maximum income guideline, the MCC Commitment will be canceled. 4.3
Change in Acquisition Cost
If the total acquisition cost of the residence purchased in connection with the MCC increases so as to exceed the acquisition cost limitations set forth herein, the MCC Commitment shall be revoked. For a change in acquisition cost after the Commitment and prior to escrow closing which does not exceed maximum price guidelines, the Lender will be required to originate and submit a new version of: the MCC Application (page one amended and initialed by the Applicant); Amended Escrow Instructions; and the Seller Affidavit.
4.4
Changes in Loan Amount
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Any changes to the loan amount which occur after MCC Commitment and prior to escrow closing must be reported to the Administrator immediately by phone, and followed up in writing. The change must also be declared on the Closing Affidavit. If the amount of the loan increases, thereby causing an increase in the credit amount, the MCC Commitment will be revoked if that increase in credit amount increases the aggregate credit limit by the State. 4.5
Lender's Obligation to Notify Administrator of Material Changes
The decision to issue a MCC Commitment is based (in part) upon the Applicant's and Seller's Affidavits and the Lender's certification that the requirements necessary for issuance of a qualified MCC have been met. The Lender must immediately notify the Administrator in writing of any change in the circumstances upon which the MCC Commitment was issued. If any other change of the circumstances upon which the MCC Commitment was issued occur so that the MCC to be issued will not meet the requirements of a qualified MCC, the MCC Commitment will be revoked. This is the end of the MCC Program Manual. A second document, the MCC Handbook, provides a quick reference for MCC processors. It includes a step-by-step application guide, an outline on the sequence of the MCC process, and a guide for underwriting an MCC loan.
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APPENDIXES
A.
DEFINITIONS
B.
ACQUISITION COSTS
C.
INCOME GUIDELINES
D.
RECAPTURE TAX NOTICE
E.
MOBILE HOME/ MANUFACTURED HOUSING
APPENDIX A
GENERAL DEFINITIONS As used in this MCC Manual and all MCC Program documents, unless the context requires otherwise, the following words and terms have the meanings set forth below: ACQUISITION COST has the meaning given under I.R.S. Section 143(k)(3) and the regulations thereunder. The acquisition cost limit is set by State law under Section 52020 et seq. of the Health and Safety Code. "Acquisition cost" is used interchangeably with "purchase price". Maximum purchase prices for previously occupied and new homes are updated, according to a federal study every 12-24 months, or they can be derived from the results of a special study performed by the issuer and approved by tax counsel. The maximum purchase price for non targeted areas represents 90% of the average area purchase price for new and previously occupied homes. In targeted census tracts, the maximum price is 110% of the average area purchase price for new and previously occupied homes. For more information see Appendix B. AFFIDAVIT means an affidavit filed in connection with the program made under oath and subject to penalties of perjury. APPLICANT also HOME BUYER or ELIGIBLE BORROWER means any person who applies for an MCC under the Program. CLOSE OF ESCROW means the date the loan is recorded by the County Recorder. COMMITMENT or MCC COMMITMENT is issued by the MCC Program based on funding availability and review of Application documentation and the Lender's certification that the requirements necessary for issuance of a qualified Mortgage Credit Certificate have been met. A Commitment will be valid for 120 days. Generally , the MCC program will only issue a commitment for a loan which has not been funded. Depending on the circumstances, exceptions can be made. These exceptions may require payment of penalties by the Lender. COUNTY means the County, Office of the MCC Program Administrator, acting as agent for the County. DATE OF ISSUE means the date on which the escrow closing occurs, the date the deed is recorded. ELIGIBLE BORROWER means any person meeting the criteria for an eligible borrower set forth in this manual who is in the process of securing financing for the purchase of a Principal Residence. Also: "APPLICANT". ELIGIBLE DWELLING means new or previously-occupied single-family, owner-occupied houses, townhouses, condominiums, mobile homes and manufactured housing. (see definition of
Mobile Homes/Manufactured Housing, Appendix E .) The property must be located in one of the participating cities or in the unincorporated County and must meet the criteria set forth in Section 3 of this manual. Ineligible dwellings include duplexes, unattached mobile homes and trailers, unimproved land, investment or rental property and vacation homes. No more than 15% of an eligible dwelling (based on usable square footage) can be used for purposes other than principal residence (i.e., office , rental, etc.) FIRST TIME HOME BUYER means those persons who have not had an ownership interest in a "Principal Residence" in the last three years. INCOME (Household) means income of the mortgagor (or mortgagors) and any other person who is expected to both live in the residence being financed and to be secondarily liable on the mortgage. All income derived from any source including income from wages, gross pay, overtime, pension, veterans compensation, bonuses, public assistance, alimony, net rental income, dividends and interest, assets, etc. of all the members of the household (other than minors) who contribute to the expenses of the household and will occupy the dwelling should be included. Maximum buyer income figures are updated, according to a federal study every 12-18 months. Maximum income figures are based on the latest median area income figure for a family of four (for the local metropolitan area). Adjustments are made for family size and targeted census tracts. In non targeted census tracts, the maximum income for a one to two person household is 100% of median; for three or more persons, it is 115% of the median. In targeted census tracts the figures are 120% of the median for one to two person households, and 140% of the median for three persons or more. See Appendix C for more information. ISSUER means the County exercising bond issuing authority through the MCC Program. LENDER means a financial institution, which has met all the requirements established by the MCC Program to participate as a Lender in the MCC Program, and has entered into a Quality in Participation Agreement acceptable to the Program. A Participating Lender can be either a funding lender, correspondent or mortgage broker. However only a Funding Lender can submit the closing MCC documents. LOAN means an extension of credit provided to an Eligible Borrower to finance the purchase of an Eligible Dwelling. The Mortgage Credit Certificate pertains to such a loan. MCC PROGRAM means the Mortgage Credit Certificate Program established by the County Board of Supervisors by Resolution and administered by the Office of the MCC Program Administrator, pursuant to the rules and regulations included in the MCC Program Manual. MORTGAGE CREDIT CERTIFICATE RATE means the rate specified by the MCC Program for the Mortgage Credit Certificate. See Table 1in the MCC Program Manual for the mortgage credit certificate rate.
MORTGAGE CREDIT CERTIFICATE (MCC) means a document issued by the County on behalf of the MCC Program that entitles the holder to claim a federal income tax credit. This tax credit is designed to reduce the federal income tax of a qualified buyer purchasing a qualified home in order that he/she will have more disposable income to apply towards his/her mortgage payments. The MCC is issued by the County pursuant to 25 of the Internal Revenue Code of 1986, as amended, and applicable State and Local Requirements. NEW HOME means a dwelling unit that is proposed to be constructed, currently under construction, or existing but not previously occupied. OWNERSHIP: means any of the following interests in residential real property: o fee simple interest o joint tenancy o tenancy in common o interest of a tenant-shareholder in a cooperative o life estate o interest held in trust for the Applicant that would constitute a present ownership interest if held by the Applicant o community property Ownership does not include a remainder interest, a lease with or without an option to purchase or any interest acquired on the execution of the purchase contract. PRINCIPAL RESIDENCE For the purpose of prior home-ownership, "principal residence" means (1) a single-family house, (2) condominium or townhouse unit, (3) stock held by a tenantstockholder in a cooperative housing operation (as those terms are defined in the Internal Revenue Code Section 216(b)(l) and (2); (4) occupancy of a unit in a multi-family building owned by the Applicant; and (5) any manufactured home (including a mobile home) as defined under federal law which is of a type customarily used at a fixed location. Principal residence does not include recreational vehicles, campers, and other similar vehicles, or investment property which has not been occupied as a "principal residence" by the Applicant during the past three years. PREVIOUSLY OCCUPIED means a dwelling unit that has been previously occupied prior to loan commitment. (Sometimes referred to as "Existing or "Resale") PURCHASE PRICE In all MCC program documents, "purchase price" is used interchangeably with "acquisition cost." RECAPTURE TAX If a home is purchased in connection with a MCC and that home is sold within nine years from the date of escrow closing, the seller of the home may be subject to a recapture tax in the year in which the sale takes place. Please see Appendix D for a complete explanation of the recapture tax. SINGLE-FAMILY AND OWNER-OCCUPIED RESIDENCES: For purposes of
determining eligibility of a home to be purchased under this program, the term "single-family" residence means a housing unit intended and used for occupancy by one household. TARGETED AREA or (TARGETED CENSUS TRACT) means a census tract in which 70% or more of the households have an income which is 80% or less of the statewide median family income, or an area designated as an area of chronic economic distress. Such areas are not subject to the prior home ownership restriction. Also maximum purchase prices are higher (up to 110% of average area purchase price) and household income can be higher (up to 140% of median household income.) See Table 2 for a list of the target areas.
APPENDIX B
ACQUISITION COST The term "acquisition cost" means the cost of acquiring a residence from the Seller as a completed residential unit. Acquisition cost includes the following: 1.
All amounts paid, either in cash or in kind, by the purchaser (or by a related party for the benefit of the purchaser) to the seller (or a related party for the benefit of the seller) in consideration for the residence.
2.
Real estate commissions paid by the buyer. If the buyer enters into a commission agreement with a real estate broker, the portion of the commission to be paid by the buyer must be added to the acquisition cost.
3.
If the residence is incomplete, the reasonable cost of completing the residence, irrespective of how the cost of completing construction is to be financed. For example, the acquisition cost would include the cost of completions necessary to obtain an occupancy permit.
4.
Where a residence is purchased subject to a ground rent, the capitalized value of the ground rent, calculated pursuant to directions from the County.
5.
With respect to new construction, the cost of upgrades, regardless of how purchased (i.e. out-of-pocket), increases the value of the property; therefore, if the contract sales price does not include the upgrades, the cost of the upgrades must be added into the acquisition price of the residence.
The term "acquisition cost" does not include the following: 1.
The usual and reasonable settlement or financing costs. Settlement costs include titling and transfer costs, title insurance, survey fees, or other similar costs. Financing costs include credit reference fees, legal fees, appraisal expenses,"points" paid by the Buyer (but not "points" paid by the Seller, which are assumed to be borne by the mortgagor through higher acquisition cost), or other costs of financing the residence. However, such amounts will be excluded in determining acquisition cost only to the extent that the amounts do not exceed the usual and reasonable costs which would be paid by the Buyer where financing is not provided through a qualified mortgage bond issue. For example, if the purchaser agrees to pay to the Seller more than a pro-rata share of property taxes, such excess shall be treated as part of the acquisition of a residence.
2.
The value of service performed by the mortgagor or members of the mortgagor's family in completing the residence. For purposes of the preceding sentence, the family of an individual shall include only the individual's brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. For example, where the mortgagor builds a home alone or with help of family members, the acquisition cost includes the cost of materials provided and the work performed by subcontractors
(whether or not related to the mortgagor) but does not include the imputed costs of any labor actually performed by the mortgagor or a member of the mortgagor's family in connection with the residence. Similarly, where the mortgagor purchases an incomplete residence, the acquisition cost includes the cost of material and labor paid by the mortgagor to complete the residence but does not include the imputed value of the mortgagor's labor or the labor of the mortgagor's family in completing the residence. 3.
The cost of land which has been owned by the mortgagor for at least two years prior to the date on which construction of the residence begins.
APPENDIX C
INCOME DETERMINATION FACTORS "General Guide" The Mortgage Credit Certificate Program's Maximum Income Limit is set pursuant to the Internal Revenue Code and restrictions of the Federal Department of Housing and Urban Development. For purposes of whether an Applicant has exceeded the Maximum Income Limit, the Gross Income Of the Applicant(s) must be determined. The income of the following persons must be taken into account: 1.
Any mortgagor (or co-mortgagor) liable on the mortgage loan (i.e. on the First Deed of Trust).
2.
Any other person who is "secondarily liable" and is expected to live in the financed residence.
The income of any persons listed on the First Deed of Trust must be included to determine eligibility for the MCC program. For a married couple, total gross income must be counted, regardless of who is on the title. Typically in California co-signers or guarantors are asked to be mortgagors, which means their income must be included. Gross Income shall not be reduced by the amount of child support payment a Husband/Wife makes for the care of a child or children. However, a husband/wife who receives child support payments must include this amount as income. 1.
2.
Gross Income Shall Be Determined Without Deductions for the Following: a.
Funds paid into a tax shelter retirement account.
b.
Child support payments made by an Applicant for the benefit of the Applicant's child or children.
c.
Alimony, separate maintenance, or similar periodic payments that an Applicant is required to make to a spouse or former spouse.
Gross Income Shall Include, but Not be Limited to, All of the Following: a.
The gross amount, before payroll deductions, of wage and salaries, overtime pay, commissions; fees; tips; bonuses; gambling winnings and prizes; and other compensation for personal services.
b.
The net income from an operation of business or profession or from the rental of real personal property. For this purpose, if this operation results in a loss, the loss
may not be used to offset income generated from other sources. For this purpose, any shareholder that owns 10 percent or more of any outstanding class of stock in a corporation, shall also be deemed to have received income in its proportionate share of net earnings not otherwise distributed in salaries or dividends.
3.
c.
All dividends and interest, including otherwise tax-exempt interest.
d.
The full amount of the periodic payments received from social security, housing assistance payments, annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts including any lump sum payment for the delayed start of a periodic payment.
e.
Payments in lieu of earnings, such as unemployment and disability compensation, workers' compensation, and severance pay.
f.
The full amount of public assistance payments.
g.
Periodic and determinable allowances, such as alimony and separate maintenance payments received, housing allowances received, and regular contributions or gifts received from persons not residing in the dwelling, where such sums are received on a current basis and which may be reasonably expected to continue.
h.
The distributive share of partnership income.
i.
Child support payments received by an Applicant for the benefit of the Applicant's child or children.
j.
All regular pay, special pay and allowances of a member of the Armed Forces (whether or not living in the dwelling) who is the head of the household of spouse (or other persons whose dependents are residing in the unit).
Gross Income Does Not Include: a.
Casual, sporadic or irregular gifts.
b.
Amounts which are specifically for, or in reimbursement of, medical expenses.
c.
Lump sum additions to family assets, such as inheritances, insurance payments, (including payments under health and accident insurance and workers' compensation), capital gains and settlement for personal property losses.
d.
Amounts of educational scholarships paid directly to the student or the educational institution, and the amount paid by the government to a veteran for use in meeting the cost of tuition, fees, books, and equipment.
e.
Special pay to a family member in the Armed Forces who is away from home and
exposed to hostile fire. f.
Relocation payments under Title II of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970.
g.
Foster child care payments.
h.
The value of coupon allotments for the purchase of food pursuant to the Food Stamp Act of 1977, 7 U.S.C. Section 2011 and 2027, which is in excess of the amount actually charged the eligible household.
i.
Payments to volunteers under the Domestic Volunteer Service Act of 1973.
j.
Payments of allowances made under the Department of Health and Human Services' Low-Income Home Energy Assistance Program.
k.
Payments received from Job Training Partnership Act.
l.
Income from employment of children (including foster children) under the age of 18 years.
m.
Income from caring for one or more foster children.
Military Pay For purposes of computing the buyer's gross monthly income regarding military pay, the monthly income is the "total entitlement" shown on the Applicant's most recent monthly Leave and Earnings Statement. Non-taxed income, such as a housing allowance is counted as income. Certain categories of pay, which may be revised only sporadically, may need to be considered on a case-by-case basis.
APPENDIX D
RECAPTURE TAX EXPLANATION According to Section 143(m) of the Internal Revenue Code of 1986, home-buyers with loans closing after January 1, 1991, who receive a Mortgage Credit Certificate may be subject to a "recapture tax" if they sell or transfer their home within nine years after the closing. A number of factors determine the amount of tax, if any, the mortgagor must pay; computation of the tax is somewhat complicated. In no case will the recapture liability exceed 50% of the gain from the sale of the residence. The liability will always be the lesser of: (1) half of the gain from the sale of the home, or (2) the recapture tax, as computed through the following formula: PRT = 6.25% x P x H x M- (IL x 1.05 Y) 5000 PRT = Potential Recapture Tax P = original principal amount H = holding period percentage
M = mortgagor's adjusted gross income at sale IL = original income limit Y = number of complete years mortgagor owned home
NOTE: If "M - (IL x 1.05 Y)" is greater than $5,000, that amount is treated as equal to $5,000. Some MCC holders who sell their home within nine years will not be subject to any recapture tax. Generally, there are four tests to be met in order to incur a recapture tax: 1. 2. 3. 4.
The home must be sold or transferred within nine years The sale or transfer must result in a GAIN The transfer must not be due to death or divorce The income of the seller must exceed an amount which equals an increase of 5% per year over the qualifying income in effect when the home was first purchased with the MCC. (This maximum income amount is referred to as the "Income Threshold".)
Further, if the seller's income exceeds the income threshold by less than $5,000, the seller is entitled to a reduction in the recapture tax. There are two basic steps in computing the recapture tax: (1) compute the basic tax by multiplying the original principal balance by a percentage assigned to the year in which the home is sold; and (2) (only if the seller's income exceeds the threshold by less than $5,000) reduce the tax computed in #1 by multiplying it times the excess income divided by $5,000. EXAMPLE The following is an example of how to compute the recapture tax in a situation where the MCC holder is selling the home between the first and second year after the mortgage closing, the original loan amount is $100,000, and the seller's income exceeds the threshold by $3,000. STEP 1 First, the loan amount of $100,000 is multiplied by 2.5%, the percentage in the table below which is assigned to a sale between the 1st and 2nd year after closing.
MPRT (MAXIMUM POTENTIAL RECAPTURE TAX) Date of Sale or Transfer of Home (or Prepayment of Mortgage if Earlier)
Percentage of Original Mortgage
Dollar Amount Original Mortgage of:
Before:
$100,000.00
1 year after Mortgage Closing:
1.25%
$ 1,250.00
1 or more years, but less than 2 years after Mortgage Closing:
2.50%
$ 2,500.00
2 or more years, but less than 3 years after Mortgage Closing:
3.75%
$ 3,750.00
3 or more years, but less than 4 years after Mortgage Closing:
5.00%
$ 5,000.00
4 or more years, but less than 5 years after Mortgage Closing:
6.25%
$ 6,250.00
5 or more years, but less than 6 years after Mortgage Closing:
5.00%
$ 5,000.00
6 or more years, but less than 7 years after Mortgage Closing:
3.75%
$ 3,750.00
7 or more years, but less than 8 years after Mortgage Closing:
2.50%
$ 2,500.00
8 or more years, but less than 9 years after Mortgage Closing:
1.25%
$ 1,250.00
STEP 2 Multiply the tax computed in Step No. 1 ($2,500) by $3,000 (excess income) divided by $5,000. $2,500 x
$3,000 = $5,000
$2,500 x 60% = $1,500
FINALLY The seller's tax will be $1,500 or half the gain from the sale of the home, whichever is less. Lender's Responsibility Regarding Recapture Tax The Internal Revenue Service requires that the lender: 1. Has a basic understanding of the recapture tax and explains it to the MCC applicant before collecting the MCC application fee from the borrower. 2. Has the MCC applicant sign the form entitled "Initial Notice to Mortgagor Regarding Potential Recapture Tax". This is then included in the Reservation Phase Package to the MCC Program. It is sometimes referred to as "Recapture Notice #1". In an effort to clearly and adequately explain the recapture tax, the MCC Program uses a three page form entitled "Notice to Mortgagor/Information Regarding Potential Recapture Tax" or "Recapture Notice #2". This form is generated by the MCC Program and is tailored to reflect the particular loan amount and income thresholds which pertain. The Program forwards it to the Applicant with the Mortgage Credit Certificate after loan closing.
APPENDIX E
MOBILE HOMES OR MANUFACTURED HOUSING Important Note: If a MCC Application involves a mobile home, the MCC Program should be contacted immediately; a longer processing time may be required. Eligible Units Under the Mortgage Credit Certificate Program, a mobile home or manufactured housing is eligible for a MCC if it meets the following guidelines: 1.
Does not exceed a maximum purchase price of 90 percent of the "safe harbor" Average Area Purchase Price (AAPP) published by the IRS or 110% of the AAPP with respect to targeted areas.
2.
Qualifies for a standard real estate mortgage.
3.
Is affixed to the ground with a permanent (poured) foundation.
4.
Mobile homes and manufactured housing do not include vehicles, campers, and similar vehicles. .
