By Robert Brannum
In an effort to stimulate home purchases by first-time homebuyers and other qualified borrowers, New York State has announced a new Mortgage Credit Certificate (MCC) program.
New York’s MCC program allows 20 percent of a borrower’s mortgage interest to be converted into a tax-credit that will reduce the borrower’s federal tax liability on a dollar-for-dollar basis. This tax credit can be used for each year of the life of the loan.
“The New York State Mortgage Credit Certificate will make it easier for first-time homebuyers to buy their first home and will help stimulate the state’s economy,” said Gov. David A. Paterson in a statement.
The State of New York Mortgage Agency, or SONYMA, the state agency that provides a several types of fixed-rate loans to first-time homebuyers, will administer the MCC. SONYMA was introduced in 1970 to aid low- and moderate-income families with homeownership. Fixed-rate loans are available through qualified lenders throughout the state. The state intends to finance $20 million in MCC tax credits through this program. SONYMA estimates that nearly 700 borrowers will take advantage of the tax credit before the end of 2009.
As this issue went to press, applications for the MCC were anticipated to become available by participating lenders in early fall, according to George Leocata, an SVP with SONYMA. The program, which the governor announced on Aug. 10, is estimated to save the average homebuyer $1,500 each year.
New York is positioning the MCC program as an addition to and extension of the Federal First-Time Homebuyer Credit program, which provides an $8,000 tax credit for first-time buyers. That federal program, enacted as part of the American Recovery and Reinvestment Act of 2009, is available for homes that close between Jan. 1 and Nov. 30, 2009.
The MCC enables qualified borrowers to earn a tax credit based on 20 percent of the borrower’s annual mortgage interest payment; the remaining 80 percent of the mortgage interest paid will continue to qualify as an itemized tax deduction. Borrowers with an MCC apply the credit when they file their annual federal income tax returns, and a borrower can carry-forward as many as three year’s of credit.
In an example provided by the governor’s office, a typical homeowner with a $150,000 mortgage at 5.5 percent loan rate pays $8,200 in annual mortgage interest. If the borrower participates in the MCC program, 20 percent of that interest, or $1,620, would be offset as a tax credit. Although the tax credit would be reduced each year as the mortgage interest drops (due to repaying of principal), the credit still averages to approximately $1,520 over the first 10 years of the loan.
The announcement of the program has been greeted with broad industry support, ranging from homebuilders to REALTORS®.
“We welcome the New York State Mortgage Credit Certificate offering as an important step in bringing more new and existing homebuyers to this very challenging housing market,” said Phillip LaRocque, executive vice president of New York State Builders. “A housing industry recovery always leads us out of recession and this MCC should help stimulate new and existing home sales in New York State.”
Daniel J. Hartnett, president of the New York State Association of REALTORS®, agreed, saying the association “applauds Governor Paterson for his vision in creating the Mortgage Credit Certificate program and for recognizing the importance of housing as a primary driver of the Empire State’s economy. We expect… the MCC will bring additional buyers back to the market and further boost the recovery of both the state’s housing market and economy.”
Other states have rolled out different versions of the MCC program, and while most have similar program objectives, they vary in specific program details. Texas, for example, offers an MCC program that provides a tax credit of 30 percent of the mortgage interest, although that program has an annual credit cap of $2,000. Mississippi has its own variation of an MCC program, with 25 percent credits available for conventional homes and 40 percent available for “manufactured” homes.
This is not the only state-based legislation that assists prospective first-time homebuyers; a current state law allows local governments to grant moderate-income, first-time homebuyers who buy newly constructed homes in New York State a five-year property tax exemption, starting at 50 percent in the first year and decreasing at a rate of 10 percent per year over the next four years.
Prospective first-time homebuyers will apply for the MCC at the same time they apply for their loan through a participating lender. Applicants for the MCC have to qualify by meeting SONYMA’s income and home purchase price requirements. Those limits vary by county, household size and property type. In Orange Country, for example, the income limit is nearly $112,000 for a family of three, while the home price maximum is $388,000.
Regardless of state geography, to qualify for an MCC, the borrower must be a first-time homeowner, though there are exceptions for those planning to purchase a home in a state “target area,” as defined by the U.S. Department of Housing and Urban Development (HUD) or those who are military veterans and who have received an honorable discharge.
It is also required that the loan be a fixed-rate mortgage, and that it must be a new loan – refinances do not qualify. Property eligibility includes one- and two-family houses, condos, and co-ops, and existing three- and four-family homes. The home must remain the borrower’s principal residence.
Most fixed-rate loan types do qualify, including conventional Fannie Mae/Freddie Mac loans, FHA-insured loans, and VA-guaranteed mortgages. Borrowers who take out specific “SONYMA mortgages,” defined as loans funded with state mortgage revenue bonds, are not eligible for the MCC.
Homebuyers who are already engaged in a mortgage application process can apply for the MCC, as long as they haven’t yet closed on their new home.
“Offering a federal tax credit is a powerful incentive to bring first-time homebuyers into the market and it helps with a family’s cash flow needs,” said SONYMA’s president and CEO Priscilla Almodovar. “This program will help stabilize housing prices and at the same time further Governor Paterson’s goal of promoting sustainable homeownership for working families.”
Robert Brannum is a freelance writer based in Boston with special expertise in the finance industry.