Mortgage tax credit supports first-time homebuyers

Question: The Hawaii Housing Finance and Development Corp. recently announced its intention to issue $40 million in federal mortgage tax credits to help people buy their first home. What are these credits and how do they work?

Answer: The Mortgage Credit Certificate (MCC) program provides eligible first-time homebuyers with a dollar-for-dollar federal tax credit on 20 percent of the annual interest paid on the mortgage, thereby reducing the amount of federal income taxes and increasing available income to qualify for a mortgage. The remaining 80 percent is still eligible to be claimed as an itemized deduction.

Q: Is this a new tax credit?

A: The program was authorized by Congress in the 1984 Tax Reform Act. HHFDC has been an issuer of MCCs since 1989.

Q: To whom is the program aimed at helping?

A: The program was designed to help first-time homebuyers of moderate income. The current income limit for a household size of three or more in Honolulu is $137,060 and for a household size of two or less is $117,480. The corresponding purchase price limit is $732,692.

Q: Are there limitations or qualifications to participate?

A: In addition to the income and purchase price limits, you cannot have an ownership interest in a principal residence at any time in the last three years, and the mortgage must be a new loan. It cannot be issued for the acquisition, replacement or refinancing of an existing mortgage. You may, however, be issued an MCC (on a case-by-case basis) for the replacement of construction, bridge or temporary short-term financing.

Q: What is the benefit in terms of monthly or annual savings?

A: Here is an example of how a MCC can make buying a home affordable for you:

You obtain a mortgage loan of $250,000 at 6 percent for 30 years with monthly principal and interest payments of $1,499. In the first year, you pay a total of $14,916 in interest on your mortgage loan. Because you have a MCC, you could receive a federal income tax credit of $2,983 (20 percent of $14,916). If your income tax liability is $2,983 or greater, you will receive the full benefit of the MCC tax credit. If the amount of your tax credit exceeds the amount of your tax liability, the unused portion can be carried forward up to three years to offset future income tax liability.

To receive the immediate benefit of your MCC tax credit, you would file a revised W-4 withholding form with your employer to reduce the amount of federal income tax withheld from your wages and increase your take-home pay by $249 per month ($2,983 divided by 12).

The remaining 80 percent of mortgage interest, or $11,933, qualifies as an itemized income tax deduction.

Q: How much or little have these credits been used by Hawaii homebuyers in the past?

A: To date, HHFDC has issued $165,925,325 in MCCs which has helped to assist 3,057 Hawaii individuals and families in purchasing their first home. 

It should be noted that only in the last seven years has the MCC program been heavily utilized. There were 748 MCCs issued between 1989 and 2006. Since 2007 HHFDC has issued 2,309 MCCs with the demand continuing to grow.

Q: What is your expectation as to how much of the $40 million will be used?

A: We anticipate the $40 million to carry the program for up to one year. HHFDC’s goal is to make this resource available on a continuous basis.

Q: When do the credits become available, and how do people apply?

A: We are anticipating July 9. Applications are available through any of our 28 participating lenders (see website).

Q: Where can someone get more information?

A: dbedt.hawaii.gov/hhfdc