States Getting With the Program

With a federal program offering an $8,000 tax credit on first-time home purchases set to expire Dec. 1, thousands of novice buyers are racing against the clock to take advantage of the deal. Housing industry professionals are moving with a renewed sense of purpose as well, as groups like the National Association of Home Builders and the Mortgage Banking Association lobby Congress to extend and expand the popular tax credit.

But frantic buyers take note: The federal tax credit isn’t the only government incentive around. Nearly every state in the union has set up first-time homebuyer programs, with many states offering multiple plans. While some programs are better than others, all are designed to stimulate sales by easing the burden of entering the real-estate market.

Michigan, for example, has four programs through the state’s Housing Development Authority. One offers prospective homebuyers a zero-interest, non-amortizing loan of $7,500 to use toward the down-payment or closing costs on the purchase of a home. The loan, available to low- to moderate-income buyers, is due upon sale or transfer of the property or if the first mortgage is refinanced or paid in full. Participants must complete a homebuyer education class and contribute 1 percent of the sale price of the home, which can’t exceed $224,500.

The state, particularly hard hit by the recession, also offers two programs that assist qualified borrowers in purchasing foreclosed or abandoned properties. One, the 80/20 Loan Program, provides 100-percent financing to borrowers purchasing foreclosed or vacant properties from participating lenders, with 20 percent of the loan forgivable. The other, called the Acquisition Rehab Loan Program, provides down-payment assistance up to $10,000 for properties not requiring repairs, or up to $25,000 for properties requiring repairs. Both programs offer buyers a zero-percent, non-amortizing second lien, forgivable over a 10-year period at a rate of 10 percent a year.

A fourth assistance plan works in conjunction with the federal Mortgage Credit Certificate program, allowing first-time buyers to credit 20 percent of their annual mortgage interest payments against their federal tax liability. Buyers must apply for the credit certificate through participating lenders, and income restrictions apply.
Mark Goedert, owner of Goedert Real Estate headquartered in Adrian, Mich., says the availability of so many assistance programs gives first-time buyers the freedom to shop for the plan that works best for them.

“It depends on the person,” he says. “If they’re thinking about buying a foreclosed or vacant home, the 80/20 program is fantastic. But if they’re in a lower tax bracket, the [Mortgage Credit Certificate plan] is fantastic.”

New York State recently unveiled its own Mortgage Credit Certificate program, which officials say will save participating homeowners an average of $1,520 a year for the first 10 years of their loan. The program allows borrowers to deduct up to 20 percent of mortgage interest paid from their federal taxes, with the remaining 80 percent treated as standard itemized tax deductions.

“The federal [tax credit] is a one-time credit ... it’s a credit that can become a refund,” says Philip Lentz, director of communications for the State of New York Mortgage Agency. “This is a little different. Instead of a deduction on 100 percent of the interest cost, you deduct 80 percent and take the other 20 percent as a dollar-for-dollar tax credit. How much it will reduce your taxes depends on the size of your mortgage and how much interest you’re paying.”

New York also offers several other programs for first-time buyers, including Closing Cost Assistance loans of up to $5,000 or 5 percent of the mortgage loan amount, and help for low- to moderate-income borrowers seeking help with down payments.

Most state-level programs can be used in conjunction with the federal $8,000 tax credit, which, according to Robert Dietz, director of tax issues for the National Association of Home Builders in Washington, has itself proved an effective tool for stimulating the housing market. The association recently publicly called on Congress to extend and enhance the sun-setting credit.

“I’m an economist and can’t really comment on the political environment in Washington, but I know the Association is going to make the case on [extending] the program in the fall,” Dietz says. “Keep in mind that the credit is refundable, so taxpayers will benefit from that full amount even if they have less than $8,000 of tax liability. First-time buyers constitute something like 40 to 50 percent of the market right now. That’s a big credit to the success of the program.”

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