When he set out to buy his first home, Guillermo Valdez was told over and over by lenders that he could not afford even the modest home he wanted.
"I had gone to different mortgage companies," he said, "and they were giving me a much lower price range that would limit my shopping. They said $100,000, which limited me a lot. (It meant going) from buying a home to buying a condominium or townhouse.
"They said I couldn't qualify for more because I was single and only had one income."
Yet Valdez persevered and today, thanks to a resourceful mortgage broker and a little-known federal program called the Mortgage Credit Certificate (MCC), the 25-year-old is enjoying his new home in Long Beach.
Valdez said the two-bedroom house he purchased in October for $127,000 is spacious and includes extras such as a den, laundry room, large yard and attached garage.
"It beats renting. I don't have to pay anybody else. Anything I invest in this house is mine," he said, adding, "I would have bought a condo or townhome, but I wanted a home of my own."
As a Los Angeles County employee, Valdez earns about $25,000 a year. A former member of the Army Reserves, he financed the purchase with a no-money-down loan from the Department of Veterans Affairs, along with the Mortgage Credit Certificate program recommended by Ron Brown, vice president/FHA and VA underwriter with PMA Mortgage in Long Beach.
"He (Brown) explained the way the MCC worked and used it as a benefit toward my income," Valdez said. "When you're buying a home, everything helps."
Just like Valdez, first-time home buyers who need an extra boost can turn to the Mortgage Credit Certificate to increase their purchasing power. While the MCC receives scant attention compared to other popular home-buying programs, it is known among lenders for providing enough assistance to help buyers with a stable, moderate income to obtain a larger mortgage and, sometimes, allowing an applicant to qualify who otherwise would not.
The MCC is a federal tax credit that allows a buyer to use money that otherwise would have gone to pay income taxes to help pay his or her mortgage. It was authorized by Congress in the Tax Reform Act of 1984 as an alternative to mortgage revenue bond-backed financing, with the intent of providing financial assistance to buyers of single-family homes.
In 1985, California adopted legislation authorizing local bond-issuing agencies to make Mortgage Credit Certificates available throughout the state. The program has been administered locally by cities and counties.
Currently, the program is in a state of flux, so qualified home buyers may need to move quickly to take advantage of remaining funds.
The California Debt Limit Allocation Committee in Sacramento, which distributes MCC funds to communities throughout the state, recently evaluated its effectiveness in comparison with other programs competing for bond allocations, such as the loans issued by the California Housing Finance Agency (CHFA). The committee is taking steps to cut back on future allocations.
"A benefit analysis showed single-family mortgage revenue bonds were more beneficial than MCCs," said Don Maddy, acting executive director of the debt limit committee. "The main criteria was how many families are getting one. We also wanted to see how many construction jobs are being created and most MCCs--80%--go to people who are buying resale houses."
In addition, Maddy said, the committee needs to decide "if it's worth it to help fewer households but to reach the higher-cost areas instead."
Many locally administered MCC programs still have allocations but stand to be phased out if the funds are not replenished. Debt limit committee members decided in a Feb. 23 meeting to halt future appropriations but postponed a vote on the issue to give local housing program proponents a chance to respond.
"It makes it a lot easier for you to qualify for a loan. It makes several thousand dollars' difference," said Charles Taylor, assistant director of redevelopment for the Los Angeles County Community Development Commission and administrator of the county's MCC program.
The MCC allows home buyers to take up to 20% of the total interest they will pay annually on a mortgage loan as a direct credit against their income tax. The adjustment increases their spendable income, or take-home pay, and subsequently increases the borrower's ability to afford a mortgage payment.
Unlike a tax deduction that is subtracted from the gross income before federal income taxes are calculated, an MCC entitles the holder to subtract the dollar amount of the credit from his or her total federal income tax bill, said Brown, who helped Valdez at PMA Mortgage.
For example, Brown said a home buyer with an 8% fixed-rate $150,000 mortgage could expect to pay more than $12,000 in interest during the first year of the loan. With the 20% MCC credit, up to $2,400 (20% of $12,000) could be taken as an annual tax credit when filing the income-tax return.
If the MCC holder in this case owes $7,500 in income tax, $2,400 is subtracted so the total tax bill drops to $5,100.
Or MCC recipients may want to consider adjusting their federal income tax withholding to receive the MCC benefit in their paychecks. This involves filing a new W-4 form to increase the number of exemptions, therefore reducing the amount of taxes withheld and increasing income.
Using the $2,400 example, Brown said, "I can now go to my employer and say, 'Deduct $200 less each month.' . . . Just for buying a house in certain areas, the government is giving you $200 a month to make that mortgage payment. This helps bridge the gap," Brown said.
Also, the home buyer does not forfeit the right to use the federal home mortgage interest deduction. MCC holders still are eligible to deduct the remaining 80% of their annual mortgage interest payment against their gross income at tax time.
The MCC program has income limits for participants, but California's are set high enough--at nearly $70,000 for a multi-person household--that most first-time buyers can use an MCC.
"What's nice about this program is it helps the people with a moderate income," said Sally Richman, MCC program manager for the city of Los Angeles. "It's not just a low-income program."
Los Angles-area MCC applicants generally earn a moderate income of $30,000 to $40,000, she said, adding that the median income for the Los Angeles area is $40,000.
MCCs are particularly efficient since lenders process all the paperwork. Each participating city and county has a list of approved lenders that borrowers can use.
Yet people usually will not find out about the benefits of obtaining an MCC until they visit a lender who participates in the program. And sometimes, not even then.
Gabriel Garza, owner of American Capital in Montebello, said the MCC program is "a big success" at his mortgage brokerage, which specializes in helping first-time buyers.
"Even though this program has been around since 1984, the word hasn't gotten out," he said. "A lot of people don't know about it."
That may be changing, according to Cheryl Barba, staff analyst for Orange County's MCC program.
"It seems like in the last year or so, there's been a lot of word of mouth information spread about the MCC, (whereas) before it was left up to the cities to tell people," she said. "The lending community and the realtors have picked up the ball and are disseminating information--that's part of the reason the program is gaining momentum.
"Folks who never thought they'd be eligible for homeownership now find they can be, through programs like the MCC," Barba said.
Buying a House: The MCC Difference
THE PLAYERS: * Buyer A has an MCC--a tax credit that can be used toward monthly mortgage payments. * Buyer B does not. Both buyers have the same annual income ($53,000), same down payment and are applying for the same loan ($144,000, 30-year fixed-rate mortgage at 8%).
THE RESULT: If the lender uses the standard 28% debt-to-income ratio, Buyer A must show a monthly income of at least $4,050 (annual $48,598), while Buyer B must show monthly income of $4,805 (annual $57,655). * Buyer A qualifies (with MCC). * Buyer B does not.
Buyer A Buyer B $160,000 House sales price $160,000 16,000 Down payment 16,000 144,000 Amount finances 144,000 1,057 Housing payment 1,057 166 Property taxes 166 100 Homeowner's insurance 100 42 Mortgage insurance 42 1,365 Total housing payment 1,365 192 Minus MCC credit 0 $1,173 Monthly payment $1,365