SANTA CRUZ (July 27, 2008) - The only first time homebuyer program that actually puts money back in the homebuyers’ pockets has recently been funded and is ready to go for 2008. Each spring for as far back as I can remember the Housing Authority of the County of Santa Cruz announces its annual allotment for the Mortgage Credit Certificate (MCC) program. Many counties throughout the state offer a MCC as well.

The Housing Authority of Santa Cruz County administers the program (they do a great job at it!) and just announced the 2008 version. To take advantage of this program the borrower must work with a participating lender or mortgage broker. Not every lender participates in the MCC program so be sure to check with your mortgage professional or ask your real estate agent to direct you to a participating lender.

Here’s the benefit: the home owner gets a tax credit (not just a deduction!) of 20 per cent of the interest portion of his mortgage payment each month. For example, on a $417,000 loan used to buy a home, the monthly principal and interest payment will be $2636 for a 30 year fixed rate loan at an interest rate of 6.50 percent. The MCC program will allow the owner to deduct up to $5421 from his federal income tax bill in 12 months of home ownership. That is a savings of more than $450 per month!

The savings will continue throughout the life of the loan as long as the home remains owner occupied and the MCC paperwork is filed each year with the homeowner’s federal tax returns. The cash benefit of this program will decrease each year as the loan amount decreases.

It should be noted that since interest paid on a mortgage for the purchase of a principal residence is a tax deductible expense, the remaining 80 per cent of the mortgage interest paid becomes tax deductible and will represent an additional monthly savings.

There also is the added advantage that since the effective house payment will be reduced by the amount of the MCC tax credit, lenders are able to qualify home buyers for a larger mortgage loan, which translates to a higher sales price.

To receive the credit on a monthly basis, borrowers can adjust their W-4 with their employer (i.e., claim more dependents) so that they will have less deducted out of their paycheck each month for their federal income tax withholding. Or, to receive the credit annually, the credit will come back as a refund at tax time of the following year.

Who qualifies? First of all, you have to be a first time home buyer, which is defined as someone who has not owned the home that they have lived in during the past three years (it is OK to own or have owned a rental or investment property). For the property to qualify, the house or condo must be purchased for $656,775 or less (this limit was $442,508 last year). The annual income of the person(s) that is buying the home must be less than $79,990 for a family of 1 - 2  (it was $81,300 last year) or less than $91,885 for a family of 3 or more.

In order to be one of the lucky families who receives a Mortgage Credit Certificate this year in Santa Cruz County you will need to be prepared.  That means that you must take action now to be preapproved for a loan. The first step towards preapproval is to meet with a participating lender and submit 3 years of federal tax returns, W-2s, 30 days of current paystubs and 2 months of bank statements for each one of your savings, checking, stock and retirement accounts. You will not be able to take advantage of an “EZ” qualifier loan under the MCC program.

You need to start actively looking at homes. To actually apply for one of these precious MCC certificates you must be in contract to purchase the home. There is a $250 application fee that goes to the Housing Authority; your lender will fill out the paperwork for you.

In order to take advantage of these tax credits, you or your accountant must fill out IRS form #8396 along with your federal tax returns each year. Although there is a recapture provision that could trigger a partial repayment of these benefits if the home is sold within 9 years, it is not likely to kick in. Ask your mortgage consultant to explain the details. Not all lenders participate in this program so be sure to ask!

Check out program details at www.hacosantacruz.org.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.