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The Government Will Still Help You Buy a Home

Think that there is no government support for first-time home buyer’s now that the recession is over? Think again. The government has supported first time buyers for decades.  With rates at historic lows and homes still at affordable levels in most areas of the country, this is the perfect time to look into ways the government can help you get into your first home.  A home is not only a great long-term investment, it also represents security for your family and a great tax deduction as well.  It also can be available with various government subsidies.

The Mortgage Subsidy Bond Tax Act of 1980 allows state and local housing finance agencies to issue tax-exempt Mortgage Revenue Bonds (MRBs) in order to finance mortgage loans. MRB proceeds are used to purchase or originate mortgage loans at below market rates. The interest rate-savings of these mortgages will vary, however, a one percent reduction in rate could lower the payment on a $200,000 home by more than $100.00 per month.

Qualification standards for mortgages financed through these bonds may vary from state-to-state.

Generally, to be eligible for this financing:

    • Your household’s income cannot exceed 115 percent of area median family income.
    • The price of a home purchased with an MRB-financed mortgage may not be greater than 90 percent of the average price of homes in that area.
    • You must not have owned a home in the previous three years.
    • The purchase must be of a primary residence.
    • Exceptions to one or more of these rules may be available for homes purchased with targeted low-income neighborhoods, households with many members, or households living in certain high cost areas.

Down payment Assistance. One of the greatest obstacles to purchasing one’s first home is coming up with a down payment and money to pay for closing costs. A second use of Mortgage Revenue Bonds is to fund down payment assistance programs. The same eligibility factors typically exist for down payment assistance as specified earlier for reduced interest rate financing. Again, the program will vary from jurisdiction-to-jurisdiction, however, typically the assistance will be available in the form of a second mortgage which can pay for the down payment and/or closing costs.

Some of these second mortgages may be “soft-seconds.” A “soft-second” requires no payments and does not count as a loan in accordance with lender guidelines. For example, if a Federal Housing Administration (FHA) mortgage requires at 3.5% down payment, the second could suffice as the down payment. Fannie Mae, Freddie Mac and FHA mortgages all have guidelines that allow government assistance for down payments and many banks have similar provisions as well.

A soft-second may not even have to be paid off when the home is sold if the home is owned for a certain period of time. Once again, the benefits will vary between jurisdictions.

Mortgage Credit Certificates. Another use of Mortgage Revenue Bonds is to finance Mortgage Credit Certificates (MCCs). These “certificates” are credits the homeowner can use to obtain a credit against their taxes for interest paid on a portion of a mortgage. You probably already know that mortgages on primary residences are tax deductible. The benefit of a credit is that it is a dollar-for-dollar benefit. For example:

    • A $1,000 interest payment would result in a benefit of $250 if you are in a 25 percent tax bracket;
    • A $1,000 tax credit would result in a benefit of $1,000.

Sounds great? The government is basically helping you pay for your mortgage. Before you get too excited, there are some restrictions in addition to the guidelines mentioned previously:

    • The credit can’t be claimed on the entire mortgage. Typically, the maximum is 20 percent, however the rest of the interest paid is tax deductible;
    • $2,000 is the maximum amount of credit that can be claimed annually;
    • Though these credits can be attached to a wide variety of loans, they can’t be combined with reduced rate MRB mortgages offered by the agencies.
    • You can’t take a credit on taxes you don’t owe.

Lower interest rates, down payment assistance or a dollar-for-dollar credit? These benefits are designed to help first time buyers purchase their first homes. This is the time to take advantage!