However, and most pertinent, Section 1006 (e) of ARRA also eliminated the prohibition of the Borrower’s access to the federal First-Time Home Buyer Tax Credit if their loan was financed with Mortgage Revenue Bonds (MRBs).

The CHFA FirstStep and CHFA FirstStep Plus programs, made available on February 1, 2010, are funded with MRBs. Many ARRA or federal First-Time Home Buyer Tax Credit-related websites have not been updated to highlight this specific provision of the law; however, the actual IRS Form 5405 has been updated to reflect this change. Click here to read complete ARRA bill as written.

The Wynn Team has found that the National Association of Home Builders website created for the First Time Home Buyer Tax Credit has the most comprehensive information and the best FAQ page of any other site.  By the way, they have updated the MRB inclusion.

This is important because qualified first time home buyers who need down payment assistance and want to take advantage of the First Time Home Buyer Tax Credit before it goes away can finance a home with competitive market rates.

Lending A Hand

Marla Wynn

The Wynn Team

Everyone knows that their monthly payments for the first several years of their home mortgage are made up largely of interest.  For this reason, large fluctuations in your mortgage interest rate can really impact your bottom line.  With the recent increases in mortgage interest rates, we thought we should inform new homebuyers of the CHFA MCC program which can make the interest you pay more rewarding.

For loans that close prior to June 25, 2010, buyers who meet the following criteria may apply for the CHFA MCC.

• Household income and home purchase price limits
• FICO score of 580 or higher
• Use the new home as their primary residence
• Have not owned a home as primary residence in the past three years (first time homebuyers) OR are current homeowners looking to refinance certain qualified subprime mortgages, OR who are eligible veterans may apply.

What does it all mean?  The CHFA MCC program allows qualified homebuyers to claim a dollar-for-dollar reduction of income tax liability equal to 20% of their paid mortgage interest on their first mortgage….for as long as they own (and live in) their home!  In addition, the remaining 80% of the paid mortgage interest continues to qualify as an itemized tax deduction.

Let’s look at an example (simplified for illustration purposes – for a full example check out CHFA’s MCC example):

$150,000 Purchase Price @ 5.5% Interest Rate

Homebuyers who purchased a new home with a loan amount of $150,000 at an interest rate of 5.5% will get double the tax refund related to the home mortgage only.  The $1,650/yr in additional tax deduction (from MCC) equates to a monthly savings of $137.50 which FEELS like a LOWER INTEREST RATE.  Calculating it out the effective interest rate you would be paying in this scenario would drop from 5.5% to 4%!!

Not all lenders participate in the program, so to be sure you select one who does, visit CHFA’s website.  This is a huge advantage for qualified buyers!  There is another added benefit we are able to extend to our borrowers.  Very few lenders, yes we are one of the few, allow borrowers to use the monthly tax savings to qualify for a larger loan amount, which means they have more purchasing power!  In this particular scenario, the borrower can now qualify for a $174,000 loan instead of the $150,000 loan.  The borrower can adjust their W-4 withholdings to receive the extra money during the year.

There has to be a catch, right?  Well, there is, although the likelihood of a penalty is fairly small.  Borrowers who participate in the MCC program are subject to recapture tax.  We stated the likelihood of a penalty is small (only 1 customer in our 13 years, and over 500 customers, of doing these types of loans has ever had to pay the penalty) and here’s why.  Three things must occur simultaneously to trigger recapture tax.

1. The buyer has to sell their home in the first 9 years of ownership
2. The income of the buyer has to have increased significantly – over the maximum limits for the year they sell and
3. The buyer has to make a profit on the sale of the home.

There is a one time fee to participate in the CHFA MCC program, but your refund in the first year will more than make up for the fee in the first year.

If you are looking to buy in the state of Colorado and would like to use this program, contact us and we will help you!

Lending A Hand

Marla Wynn

The Wynn Team

I received a call from a customer who was interested in a condo and wanted a maximum monthly payment of $1,000.  We’ll call him Gaston (obviously a fictitious name).  Gaston had only $1,000 to put down on the purchase of his new home.

His limited cash issues told me three things:  We would need to go with an FHA loan which has a lower down payment requirement than conventional financing (3.5% vs. 5%), Gaston would need to utilize a down payment assistance program for the remaining 3.5% of his purchase price, and he would need the seller to pay the bulk of his closing costs.

Colorado Housing and Finance Authority (CHFA) always has funds available to lend to qualified buyers and they have down payment assistance programs buyers can utilize when financing their first mortgage through CHFA.  Although Gaston had excellent credit, CHFA’s minimum credit score requirement is typically lower than most investors, which makes it an even more useful program.  Their interest rates are currently higher, however, which is the only downfall of utilizing CHFA.

JumpStart2 is a CHFA program that would allow Gaston to borrow the 3.5% down payment and monetize the federal First-Time Homebuyer Tax Credit Program.  Payments and interest are deferred until December 31, 2010 so as long as he pays the entire balance of the second mortgage when he receives his $8,000 tax credit he won’t owe any interest.

The property Gaston was most interested in purchasing was listed at a much higher price than we had calculated he could afford.  He made an offer to purchase the property at a price that met his maximum monthly payment.  The seller countered, but not at a price low enough for him to purchase it.

We went to work to determine if there were any other avenues we could take to bring his monthly payment down.  We asked Gaston if he could put more money down on the transaction.  If he were able to use his own money for down payment, we would be able to finance an FHA loan without using CHFA, which would decrease his interest rate and lower his payment.

Gaston did not have the ability to put 3.5% down so we knew we needed to use a down payment assistance program.  He was purchasing in Denver so we decided to call the Colorado Housing Assistance Corporation (CHAC) program to see if they had funds available.  This program would allow Gaston to utilize their funds for down payment assistance.

The CHAC loan would be a second mortgage without prepayment penalty, so although he would be paying some interest before receiving his tax refund, he could pay off the second mortgage rather quickly.  In addition, we could utilize an FHA loan at a lower interest rate than CHFA was offering so he would actually be saving money on interest overall.

Gaston also made the decision to apply for the statewide Mortgage Credit Certificate (MCC) program that can help homeowners justify a larger monthly payment.  The MCC program would allow Gaston to claim a dollar-for-dollar reduction of income tax liability equal to 20% of his paid mortgage interest each year he lives in the home….forever.

His credit each year was going to equate to roughly $1,670 or $139 per month.  In addition to receiving the 20% credit on his federal taxes, the remaining 80% of the paid mortgage interest would continue to qualify as an itemized tax deduction.

In the end, we were able to get Gaston into the home he preferred at the seller’s counter offer price by using CHAC and an FHA loan.  This lowered his interest rate and therefore, his monthly payment.

Lending A Hand

Marla Wynn

The Wynn Team

How do you know if you qualify? The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase date of a new home.  If this is you, then the answer is, “yes.”  The “purchase” date refers to the date you are under contract on a new home.  This date must be no later than April 30, 2010 and you must close on your new home no later than June 30, 2010.

For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. That is, both spouses must qualify as long-time residents, with at least five years of principal residency for each.

Do I have to purchase a more expensive home to qualify? The answer is, “no.”  Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.

You may have heard different figures circulating regarding the amount of the tax credit you may receive. For repeat home buyers the tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. This means that as long as you purchase a home that costs at least $65,000; you will receive the full $6,500 credit.  Purchases of homes priced above $800,000 are not eligible for the tax credit.

There are some income limits for claiming the tax credit. The income limit for single taxpayers is $125,000; for married taxpayers filing a joint return the limit is $225,000. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. For specific information regarding your MAGI, you can visit the National Association of Home Builders website related to the tax credit at www.federalhousingtaxcredit.com

Claiming the tax credit is easy. The credit is a federal income tax credit so homebuyers should complete IRS form 5405 to determine their tax credit amount.  This then gets entered on line 67 of the 1040 income tax form for 2009 returns.

What kinds of homes qualify? Any home that will be used as a principal residence (meaning you will live in the home) will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.

Some purchases that would not qualify are homes purchases from family members. More specifically your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members.

For more information about how to monetize your tax credit, or receive the money immediately, rather than waiting until you file your 2009 or 2010 income taxes to receive a refund, visit the National Association of Home Builders tax credit website’s frequently asked questions page.

Lending A Hand,
Marla Wynn

• FHA will permit certain entities to use the current authority to offer tax credit advances in the form of second liens with the following conditions:
  • The tax credit advance can not result in cash back to the customer
  • The second lien can not exceed the total amount for the down payment, closing costs and pre-paids
  • The second may be silent (not requiring a payment) or require a payment
  • If the second requires monthly payments the payments must be included when qualifying for the mortgage
  • Payments must be deferred for a minimum of 36 months to not be included in the qualifications
  • If the tax credit advance has a short term for repayment, it must also provide if the borrow fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a silent second
  • The second may not require a balloon payment within ten years

• FHA will permit FHA approved nonprofit organizations as well as Federal, State and local government agencies may purchase the tax credit with the following conditions:
  • The proceeds from the sale of the tax credit may not exceed the anticipated tax credit due to the homebuyer
  • The borrower must submit a signed certification that the tax credit is not subject to offset due to other indebtedness
  • A copy of the borrower’s tax refund must be obtained and included with the mortgage financing
  • Fees related to the purchase of the tax credit should not exceed 2.5% and must be reduced from the anticipated tax credit
  • The tax credit may not be used as down payment if the purchaser of the tax credit is an interested party (lender, seller, real estate agent, etc)

For the full letter and details you can be found on HUD’s website.

How Does this impact Colorado Housing and Finance Authority (CHFA)?

Plain and simple – it doesn’t.  Here is the eNews provided by CHFA today:

CHFA JumpStart Clarification

There has been much confusion and rumors in the past few weeks regarding the CHFA JumpStart loan program and its compatibility with FHA insurance. This confusion arose when the FHA issued Mortgagee Letter 2009-15 on May 11, 2009, then recalled it on May 12, 2009. 

Friday, May 29th, the FHA issued a new 2009-15 Mortgagee Letter clarifying its guidance on how the Federal First Time Tax Credit may assist eligible borrowers purchase a home. 

The CHFA JumpStart Loan Program complies with the FHA guidelines and is eligible for FHA insurance. 

However, there is a provision in the Mortgagee Letter that allows all FHA-approved mortgagees and FHA-approved non profit organizations, and local government agencies and instrumentalities to purchase the tax credit anticipated by the homeowner. To be clear, CHFA is not purchasing the borrower’s anticipated tax credit. CHFA is providing a second mortgage to be used for downpayment and/or closing cost assistance. CHFA encourages the borrower to use the tax credit to repay the second mortgage while in a zero (0%) percent interest deferral period. If not repaid by June 30, 2010, the CHFA JumpStart second mortgage becomes an 8%, 10 year term loan with required monthly payments. 

Because of this provision, CHFA will not approve any borrowers who have “sold” their tax credit to use the CHFA JumpStart Loan Program. These borrowers will be eligible for the CHFA HomeOpener program. 

If you have any questions about CHFA’s JumpStart or HomeOpener program please contact us.

Other Options

At this time we are unaware of any nonprofit organizations or government agencies providing second liens or tax credit advances.  As we hear anything we will be sure to update you here.

Lending A Hand

Scott Wynn