1 El Paso County, Colorado ADMINISTRATOR S GUIDELINES PUBLISHED Updates are shown on Page 3
2 El Paso County, Colorado MCC Program Page 2 TABLE OF CONTENTS PROGRAM UPDATES 3 THE ORIGINATION TEAM 4 THE PRODUCT 5 MORTGAGE CREDIT CERTIFICATES 5 What is a Mortgage Credit Certificate? 5 What is the lender involvement? 6 Homebuyer Benefit 7 What does the Homeowner have to do to claim the benefit with the IRS? 7 Special Rules 7 ABOUT THE MCC PROGRAM 8 The Program 8 Allowable Loan Products 8 Program Requirements 8 Targeted Areas 9 El Paso County Census Tracts 9 Prohibited Loans 9 Recapture Tax 9 MCC Processing Timetable 9 Term of Program 9 HOW TO ORIGINATE LOANS WITH MORTGAGE CREDIT CERTIFICATES 10 STEP 1 - QUALIFY THE BORROWER(S) 10 STEP 2 - QUALIFY THE HOUSEHOLD INCOME 10 STEP 3 - QUALIFY THE PROPERTY 11 STEP 4 - MAKE SURE THE PROPERTY SALES PRICE QUALIFIES 11 STEP 5 - REVIEW ALLOWABLE LOAN PRODUCTS 11 STEP 6 - SIGN AND DATE THE NOTICE OF POTENTIAL RECAPTURE 11 STEP 7 - RESERVE THE MCC ONLINE 12 STEP 8 - UNDERWRITER CERTIFICATION 12 STEP 9 - PREPARE THE FORM FOR CLOSING 12 STEP 10 - REVIEW THE PROGRAM FEES 12 STEP 12 - USE THE COMPLIANCE FILE CHECKLIST 13 STEP 13 - CHECK THE STATUS OF LOANS - CHECK FOR EXCEPTIONS. 13 STEP 14 - MCC 13 SUMMARY OF ALLOWABLE PROGRAM FEES 14 UNDERWRITERS MCC COMPLIANCE INCOME CALCULATION GUIDE 15 LIST OF PROGRAM COMPLIANCE FORMS 19 SIGNATURES ON MCC FORMS/DOCUMENTS 19 OTHER DOCUMENTS REQUIRED FOR MCC COMPLIANCE FILE 20
3 El Paso County, Colorado MCC Program Page 3 Date PROGRAM UPDATES
4 El Paso County, Colorado MCC Program Page 4 THE ORIGINATION TEAM EL PASO COUNTY, COLORADO The Issuer serves as the sponsor of this program. The Issuer creates the Mortgage Credit Certificate (MCC) program. It determines the MCC credit rate, special requirements for the parameters of the first mortgage, and may offer down payment assistance. PARTICIPATING LENDERS Take Mortgage Credit Certificate (MCC) applications, provide a first mortgage including the Issuer s Turnkey first, and process, underwrite, approve, fund, and close the loan, and process the MCC simultaneously. EHOUSINGPLUS PROGRAM ADMINISTRATION Maintains the program reservation system, websites, and posts guides, forms, training materials, provides training on compliance issues and system, issues usernames and passwords, answers program compliance questions, provides online forms, receives compliance files, reviews, posts and notifies of exceptions, approves compliance file, and issues the MCC to borrowers.
5 El Paso County, Colorado MCC Program Page 5 THE PRODUCT MORTGAGE CREDIT CERTIFICATES El Paso County, Colorado (the Issuer ) has authorized the issuance of Mortgage Credit Certificates (MCCs). The program administrator will be ehousingplus (the Administrator ). TAX DISCLAIMER This material is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This material may be used to support the promotion or marketing of the matter discussed herein. The taxpayer should seek advice from an independent tax advisor regarding the matter set forth herein based on the taxpayer s particular circumstances. What is a Mortgage Credit Certificate? A Mortgage Credit Certificate (an MCC ) is an instrument designed to assist persons of low and moderate income to better afford individual ownership of housing. The procedures for issuing MCCs were established as an alternative to the issuance of single family mortgage revenue bonds. As distinguished from a bond program, in an MCC program no bonds are issued and mortgages are financed in the conventional or government-insured market. However, the mortgagor may take a tax credit in an amount equal to the annual amount of interest paid on the mortgage loan multiplied by the Mortgage Credit Certificate rate. Currently, the Mortgage Credit Certificate rate for the program is 50%. Thus, an applicant with a $115, year, fixed-rate mortgage (monthly payment has equal monthly installments of principal and interest) and a 4.25% interest rate could realize the following federal income tax savings (numbers are rounded): Example Mortgage Amount $115,000 Interest Rate 4.25% Monthly P & I $566 Total Interest Paid First 12 mos $4,850 Mortgage Credit Rate 50% Maximum First Year Credit Amount $2,000 During the first year of the Program, the applicant in this example would be eligible for a tax credit of up to $2,000 if not limited by tax liability. The applicant would be able to file a revised W-4 withholding form taking into consideration the anticipated tax credit and have approximately $166 per month in additional disposable income in the first year. Applying that savings to the monthly payment, decreases the payment to $400. Additionally, taxpayers who file itemized returns may continue to take a deduction equal to the amount on Line 3 of IRS Form In the example, 100% of the mortgage interest paid is $4,850 so 50% of the mortgage interest paid is $2,425. Because the credit rate is greater than 20%, the amount that may be claimed as a credit is capped at $2,000, annually. According to IRS instructions on IRS Form 8396, the amount of allowable mortgage interest deduction on Schedule A is determined by reducing the amount on Line 3
6 El Paso County, Colorado MCC Program Page 6 of IRS Form 8396 ($2,000). So the total mortgage interest paid in the first 12 months was $4,850, subtract $2,000 and the remaining $2,850 may continue to be used as a deduction. The maximum annual tax credit amount of $2,000 may be used as a tax credit after all other deductions and credits have been applied and to the extent there is tax liability. If not all of the $2,000 can be used because there is not enough tax liability, it may be carried forward for up to three years. However, it cannot be added to the allowable mortgage interest deduction. If 50% of the mortgage interest paid was $1,000, then $1,000 would be shown on Line 3 on IRS Form 8396 and $4,850 less the $1,000 credit amount means $3,850 becomes the amount of a mortgage interest deduction on Schedule A. Borrowers who receive an MCC and who continue to own and occupy the financed home will be eligible for a tax credit each year for the term of the original loan. The amount of the credit actually claimed on the MCC holder s federal income tax return cannot exceed the amount of federal income taxes due after other credits and deductions have been taken into account. For example, if after taking into account other tax credits and deductions, a borrower only owes $1,000, he or she cannot use the MCC tax credits in an amount in excess of $1,000. Any unused MCC related tax credit can be carried forward up to three years to be applied against future income tax liability. A purchaser of a new or existing single family home may apply for an MCC through any mortgage lender (who is willing to sign at no cost to the lender a Lender Participation Agreement with the Issuer) at the time he or she applies for a mortgage from the lender. Any lender is eligible to participate in the Program by entering into a Lender Participation Agreement and complying with Program requirements. An MCC cannot be issued to a homebuyer who is refinancing an existing mortgage or in connection with a mortgage from a relative. Also, an MCC cannot be used in connection with a mortgage revenue bond program loan. (Please note that this program can be used with an El Paso County Turnkey program mortgage loan, if available, should the borrower qualify, because the Turnkey program is NOT a tax-exempt mortgage revenue bond program). It s important to note that all or a portion of the MCC related tax credit may be subject to recapture if the residence is sold within the first full nine years of purchase. Recapture tax is further explained in the notice of potential recapture tax and in the recapture tax brochure provided to an applicant. What is the lender involvement? Since the Issuer will not make or hold these mortgages, neither the Issuer nor the Administrator will underwrite the Loans. Rather, all loan approvals, underwriting and execution of required state and federal mortgage documents will be performed by the lenders originating the loans. The Administrator will receive executed MCC program certificates and affidavits from the lender in order to determine eligibility for the MCC Program. The MCC Program requirements are independent of any normal underwriting requirements of the lender. In order to qualify for issuance of an MCC an applicant must meet all MCC requirements in addition to any Agency (FHA, Fannie, etc) standards which must be met to satisfy Agency requirements. Unlike a mortgage revenue bond program, lenders do not sell the loan or the servicing rights into the program. The lender is responsible for filing a form with the IRS in each year in which they originate Loans for which MCCs are issued, and for keeping certain records regarding the MCCs. For lenders,
7 El Paso County, Colorado MCC Program Page 7 the annual form will be forwarded via by the program administrator for execution and filing by the lender. To be eligible for an MCC, purchasers and their spouses must be first-time homebuyers (except in federally designated target area census tracts), be buying their principal residence within the eligible lending area, and meet household income and home purchase price limits. Underwriting consideration of the MCC by an Agency (currently may be limited to FHA) is permitted in the program. Simply follow Agency guidelines. Homebuyer Benefit The MCC can reduce the amount of federal income tax liability; however, the tax benefit cannot exceed the amount of federal taxes owed for the year after other credits and deductions have been taken. Any unused credit may be carried forward for up to three years. The Issuer and Administrator are not tax advisors. Borrowers are urged to contact their tax preparers or the Internal Revenue Service regarding the calculation of MCC benefits. Each case is different. To claim the MCC benefits during the course of the tax year. Borrowers must adjust federal income tax withholding should they wish to receive the MCC benefit on a monthly basis. This adjustment is initiated by the borrower communicating this to their payroll department at their place of work. By reducing monthly withholding, they will have more disposable (after tax) income with which to make mortgage payments. If the MCC is used as an underwriting consideration, follow Agency guidelines with respect to (1) how the MCC benefits are applied and (2) proof of an adjustment to federal income tax withholding. The benefit of the MCC program continues for the term of the mortgage as long as the holder of the MCC continues to own and occupy the home under the mortgage for which the MCC was issued. What does the Homeowner have to do to claim the benefit with the IRS? Each year the homeowner files IRS Form 8396 with their federal income tax return. The form is available on the IRS website. Special Rules There are special rules regarding refinancing of the loan for which an MCC was issued. The borrower should contact the Program Administrator prior to refinancing the loan for which this MCC is issued. The program permits refinances made by lenders who were among the participating lenders in the program. Lenders contact compliance office for a compliance file checklist for refinances. It s important that borrowers understand the process and restrictions prior to committing to refinancing their loan to which an MCC is attached.
8 El Paso County, Colorado MCC Program Page 8 ABOUT THE MCC PROGRAM Issuer: El Paso County, Colorado Program Administrator: ehousingplus The Program Entitles the recipients to take an annual federal income tax credit. A tax credit represents a reduction of actual federal income taxes due. The holder of the MCC may use the credit each year the loan is outstanding as long as they continue to live in the home. Initially, the credit rate will be 50%. Please rely on the rates tab online in the ehousingplus system outside of the Lender Portal. Allowable Loan Products Lenders choose loans from their own rate sheets and underwrite their own loans. Please note that FHA has allowed an underwriting consideration for the MCC. FHA has permitted underwriters to calculate the ratios on PITI minus the MCC credit. Please consult your underwriter for current FHA policy. Loans must be -- Fixed-rate government or conventional loans with 15, 30 or 40-year term acceptable to FHA, VA, USDA:RD, Fannie or Freddie. No adjustable rate, balloon, interest only products are permitted. Stated income loans are not permitted. MCCs may not be issued for loans funded from a mortgage revenue bond program or for loans made by persons related to the buyer. No interest may be paid to a person related to a buyer. Cosigners are allowable in an FHA transaction when meeting the following conditions: (1) a cosignor cannot have any ownership interest in the property (they cannot be on the Deed) and (2) the cosigner cannot reside in the property being purchased. A cosigner will sign only the Note in the transaction. A cosigner s income is not considered for program purposes, tax returns are not required and cosigner s do not sign any program forms. For credit purposes, follow FHA guidelines. Program Requirements First-Time Homebuyer/Three Year Requirement. Borrowers and their spouses must not have owned their principal residence for 3 years prior to closing of the loan for which the MCC will be issued (with exceptions for homes located in Targeted Areas and Veterans Exception loans). The past 3 years federal income tax transcripts for all borrowers and spouses are required. Principal Residence. The home must be expected to become the principal residence of the applicant within 60 days following closing. The MCC will be effective only as long as the home remains the applicant s principal residence. Income and Purchase Price Limits. The program has household income and purchase price/sales price limits. Qualified Property. The home must be located in El Paso County, Colorado and may be a one or two unit, single family home. If two units, borrower must occupy one of the units. New Loans. The loan must be made to acquire a home and may not be used to refinance a home or pay off an existing home/mortgage.
9 El Paso County, Colorado MCC Program Page 9 Targeted Areas Borrowers purchasing in targeted areas do not need to be first-time buyers and do not need to submit the past three years tax transcripts. Targeted areas are determined by census tract number provided by HUD specifically for this program. Targeted areas are considered either economically distressed or have very low loan origination. The following census tracts constitute the HUD targeted areas for this program: El Paso County Census Tracts We copied these from the most recent IRS Rev Proc re the 2010 census. We ve added the tracts that Kutak provided. Sorry the other tracts weren't on the list. But we ve added below and they are bolded in red Prohibited Loans MCCs may not be issued for loans funded from a mortgage revenue bond program or for loans made by persons related to the buyer. No interest may be paid to a person related to a buyer. MCC s may be used in conjunction with the El Paso County Housing Authority s Turnkey Origination Program as it is not a tax exempt mortgage revenue bond program. Recapture Tax If the holder of the MCC disposes of the home within the first full nine years after issuance of the MCC or it ceases to be the MCC holder s principal residence, a portion of the tax credit may be subject to recapture pursuant to section 143(m) of the Internal Revenue Code of 1986, as amended. MCC Processing Timetable Action To Loan Stage # Days From MCC reservation made Loan closed, compliance file delivered to 90 Days and approved by ehousingplus First Mortgage Timelines El Paso County Colorado Underwriter certification submitted online 15 Days Housing Authority Turnkey first Loan and MCC Loan closed, delivered to U.S. Bank and reservation made compliance file delivered to ehousingplus 45 days Compliance file approved, Exceptions cleared, and first loans purchased 70 days Lenders should review their pipeline reports on a continuous basis in accordance with the provisions of the MCC Lender Agreement. Term of Program MCCs may not be made for loans closing after December 31, 2016.
10 El Paso County, Colorado MCC Program Page 10 HOW TO ORIGINATE LOANS WITH MORTGAGE CREDIT CERTIFICATES There are requirements imposed by the IRS and the Issuer that are reviewed for compliance with the program guidelines. It is the responsibility of the lender to assure that MCC applicants qualify for the program. After closing, the Administrator reviews the compliance file to assure compliance. Lenders follow normal procedures and review program documents to originate loans that meet the requirements modified to include the following program qualifiers: STEP 1 - QUALIFY THE BORROWER(S) First-time Homebuyer MCC applicants, their spouses and others who will both live in the property and be secondarily liable on the Note must meet the three-year no prior home ownership requirement and obtain tax transcripts. Homebuyer Education Not required but recommended. All applicants must be considered irrespective of age, race, color, religion, national origin, sex, marital status, military status or physical handicap. Buyers must occupy the property purchased within 60 days of closing. STEP 2 - QUALIFY THE HOUSEHOLD INCOME Income used for credit qualifying an applicant is different from income used for MCC program purposes. Follow the requirements listed in UNDERWRITERS MCC COMPLIANCE INCOME CALCULATION GUIDE found in these guidelines. The program requires that the income of the applicant and spouse and of all other persons residing in the household who will be secondarily liable on the Note must be included in the calculation of income for program purposes. Unlike income that is averaged for credit underwriting, the program is concerned with actual current income. Current gross monthly income is multiplied by 12 to determine "total current annualized income". Gross monthly income is the sum of monthly gross pay; any additional income from overtime, part-time employment, bonuses, income from self-employment, dividends, interest, royalties, pensions, VA compensation and net rental income, other income (such as alimony, child support, public assistance, sick pay, social security benefits, unemployment compensation, income received from trusts, and income received from business activities or investments, continuation of which is probable based on foreseeable economic circumstances based upon the applicant s affidavit (to such effect), all as computed at the time of application for a mortgage loan, adjusted per underwriter review and confirmed at the time of closing. Information with respect to gross monthly income may be obtained from the applicable certificates and affidavits provided and executed during the 4-month period ending on the date of the closing of the mortgage loan, provided that any gross monthly income not included for credit underwriting purposes must be included in determining gross monthly income. The affidavit, executed by the applicants), and certified by the lender, must include the total verified annual income of applicant(s) who will occupy the property and be secondarily liable on the note.
11 El Paso County, Colorado MCC Program Page 11 income Limits Household Size Non-Targeted Targeted 1-2 person household $72,100 $86,520 3 or more person household $82,915 $100,940 STEP 3 - QUALIFY THE PROPERTY The home purchased in the program may be a one-to-two-family residence. If a 2-unit dwelling, the buyer must occupy one of the units as their principal residence and the home must be at least 5 years old. A home may be detached, a townhouse or condominium unit. Land may not exceed that necessary to maintain basic livability. Homes are considered new if never previously occupied. Mobile, recreational or vacation homes are not eligible under the program. FHA approved manufactured housing is permitted to the extent lenders make such loans. An important requirement is that program funds are used for the purpose of acquiring, not refinancing, owner-occupied single family homes. Temporary, construction or bridge financing with a term of 2 years or less may be refinanced. The MCC program is available only in El Paso County, Colorado. STEP 4 - MAKE SURE THE PROPERTY SALES PRICE QUALIFIES The sales price of the home must be at or below the purchase price limit. The purchase price limit is the total amount paid in cash or in kind to the seller by the buyer or on behalf of the buyer and acquisition limit is the total amount paid in cash or in kind to the seller by the buyer or on behalf of the buyer and does not include financing costs. Number of units Non-Targeted Targeted 1 unit homes $265,158 $324,082 2 unit homes $339,456 $414,891 STEP 5 - REVIEW ALLOWABLE LOAN PRODUCTS Fixed-rate government or conventional loans with 15, 30 or 40-year term acceptable to FHA, VA, USDA:RD, Fannie or Freddie. STEP 6 - SIGN AND DATE THE NOTICE OF POTENTIAL RECAPTURE Have the applicant sign and date the notice of potential recapture. Please attach a copy of the recapture brochure found online to the applicant s copy of the notice. These forms and all other program forms are found in the ehousingplus lender portal. Retain the original of the notices of potential recapture. The original will be sent to the Administrator in the compliance file that is submitted following closing. A recapture brochure is not signed and not sent in the compliance file. It serves simply as a more complete disclosure.
12 El Paso County, Colorado MCC Program Page 12 STEP 7 - RESERVE THE MCC ONLINE A. If you are using just the MCC, go to the Lender Portal, sign in Username Password and Choose the El Paso County, Colorado MCC Program B. If you are using the El Paso County Housing Authority s Turnkey origination program for a first mortgage with down payment assistance AND an MCC, USE THE LENDER PORTAL FOR THE TURNKEY PROGRAM. You will reserve the first mortgage loan that automatically reserves the Assistance. You may reserve the MCC either while entering the first or after entering the first. Just click on Add Additional Tab (illustrated above) and then click on MCC. Each time income or property changes are made to the reservation, the changes are checked by the system. Should any changes made not be within the allowable income or acquisition limits of the program, the system will post an error and will not let the change update the loan file. After a loan has been underwriter certified, it cannot be changed. A lender will need to contact the compliance staff to request any other changes and will be given direction for any other necessary steps STEP 8 - UNDERWRITER CERTIFICATION Process the loan and after the loan receives final underwriting approval an underwriter must complete the underwriter certification online screen found within the ehousingplus lender portal. STEP 9 - PREPARE THE FORM FOR CLOSING Following underwriter certification, the forms may be accessed. They are auto-fill forms so that most blanks are completed by the system prior to printing. If a blank cannot be auto-filled, the blank will be interactive so that lenders may complete the blank prior to printing. STEP 10 - REVIEW THE PROGRAM FEES At time of application, Lenders charge an MCC application fee of $75 that is retained by the lender. For loans using an El Paso County Housing Authority Turnkey first mortgage loan with an MCC, at loan closing lenders charge an MCC Compliance fee of $875. For a stand alone MCC, lenders charge an MCC Compliance Fee of $750. These fees are sent to ehousingplus with the Compliance File. See Summary of Allowable Program Fees in these guidelines for more detailed information. Program Fees may be paid by the buyer or seller to the extent permitted by the Agency (FHA, Fannie Mae, etc). Compliance files will not be reviewed and MCCs will not be issued without payment of the fee to the Administrator. The interest rate on the mortgage loan shall be comparable to the rate on similar loans not receiving an MCC. Lenders fees on the first mortgage can be no more than those charged on loans without MCCs.
13 El Paso County, Colorado MCC Program Page 13 STEP 11 - CLOSE THE LOAN AND HAVE THE AFFIDAVITS/CERTIFICATION FORM EXECUTED. THE APPLICANTS EXECUTE THE FIRST SECTION, THE SELLER OR BUILDER EXECUTES THE SECOND SECTION AND THE LENDER CERTIFICATION SECTION IS COMPLETED BY THE LENDER. Federal law requires that this form be completed at closing not before. STEP 12 - USE THE COMPLIANCE FILE CHECKLIST Submit all items listed on the compliance file checklist to ehousingplus. One checklist is used for any one of the three options: (1) Just MCC, (2) MCC with the El Paso County Housing Authority s Turnkey Origination Program, or (3) just the Turnkey first mortgage with down payment assistance. STEP 13 - CHECK THE STATUS OF LOANS - CHECK FOR EXCEPTIONS. Lenders will receive an if there are any exceptions in the compliance file. Exceptions must be cleared in order for the MCC to be issued to the applicants. Check the online system for status. STEP 14 - MCC Following compliance approval, ehousingplus will the MCC to the applicant using a secure system. The Administrator will provide the lender with the required IRS reporting form (IRS Form 8329) for each year in which the lender originates loans with MCC s.
14 El Paso County, Colorado MCC Program Page 14 SUMMARY OF ALLOWABLE PROGRAM FEES First Mortgage - Lenders are permitted to charge their usual, customary and reasonable fees charged to other buyers of similar, fixed-rate products without MCC s. At closing, lenders charge the following program-related fees as listed on the compliance file checklist: Using both the El Paso County Housing Authority Turnkey first mortgage program loan with automatic down payment assistance and the El Paso County, Colorado MCC program in total: $875 $450 should be disclosed on HUD-1 as being paid to the El Paso County Housing Authority $425 should be disclosed on HUD-1 as being paid to ehousingplus Using only the El Paso County MCC program: $750 $450 should be disclosed on HUD-1 as being paid to the El Paso County Housing Authority $300 should be disclosed on HUD-1 as being paid to ehousingplus The fees may be paid by the buyer or seller to the extent permitted by the Agency (FHA, Fannie Mae, etc) or a lender s portfolio product for low and moderate income buyers, as applicable. Compliance files will not be reviewed and MCCs will not be issued without payment of the fee to the Administrator. The interest rate on the mortgage loan shall be comparable to the rate on similar loans not receiving an MCC. Lenders fees on the first mortgage can be no more than those charged on loans without MCCs. Additional Lender Compensation for the MCC The lender receives a $75 MCC Application fee charged at loan application.
15 El Paso County, Colorado MCC Program Page 15 UNDERWRITERS MCC COMPLIANCE INCOME CALCULATION GUIDE Underwriters should remember that CALCULATION OF PROGRAM (COMPLIANCE) INCOME IS DIFFERENT THAN CALCULATION OF INCOME FOR CREDIT PURPOSES. The MCC program requires that underwriters consider the income of borrowers and anyone else who will reside in the property and be secondarily liable on the Note. Use the information below as a general guide. Because each case is different, please contact the Compliance office if you have questions. Unlike income that is averaged for credit underwriting, the MCC program is concerned with actual current income. You should be reviewing the YTD income, the income of the last 4 months and the income shown on previous tax returns for consistency. You should not be averaging income. If there are not inconsistencies in earnings, use the guidelines for each loan type to determine current gross monthly income. Current gross monthly income is multiplied by remaining months in the year to determine "total current annualized income". For the tax year in which the closing occurs, consider YTD income. Then establish current base income for the balance of the year using the guidelines for each type of income. Then consider any additional income. For assistance, contact the compliance office. Gross monthly income is the sum of monthly gross pay; any additional income from overtime, parttime employment, bonuses, income from self-employment, dividends, interest, royalties, pensions, VA compensation and net rental income, other income (such as alimony, child support, public assistance, sick pay, social security benefits, unemployment compensation, income received from trusts, and income received from business activities or investments, continuation of which is probable based on foreseeable economic circumstances based upon the applicant's affidavit (to such effect), all as computed at the time of application for a mortgage loan and confirmed at the time of closing. We will check information with respect to gross monthly income obtained from the reservation form, underwriter s certification and applicable certificates and affidavits executed on the date of the Closing of the mortgage loan, provided that any gross monthly income not included for credit underwriting purposes must be included in determining gross monthly income. The limit is the limit and any amount over the limit is not acceptable. The affidavit, executed by the borrower(s), and certified by the lender, must include the total verified annual income. Questions regarding the calculation of income for MCC program purposes should be directed to the compliance office at There are many variables and the compliance office will be pleased to assist. Alternate Documentation (Alt Docs) as defined by FHA and other secondary market entities is acceptable to the extent acceptable to the Agency. Lender verification via the lender certification is required for compliance purposes, provided that such documentation includes the necessary, federal income tax transcripts. Although reference is made to VOEs and VODs in the guidelines below, they are not required if acceptable alternate documentation is in the file. This documentation includes, but may not be limited to, current pay stubs which delineate current period, W-2s, for all borrowers and all employers, and bank statements to verify assets. If W-2s are present in the loan file, lending personnel should verify that the total of W-2s presented equals the total income shown on borrower s tax returns. If a VOE is in the file, the borrower does not have to provide W-2s unless the underwriter deems this necessary for prudent underwriting. Figures shown on all documents should be consistent. See bolded paragraph below.
16 El Paso County, Colorado MCC Program Page 16 Because a program qualifier is income, even if not required for credit purposes (i.e. automated underwriting), you should be seeking the two most current paystubs with YTD. Do not include in the compliance file, keep copies for your records. Although reference is made to the last 4 to 6 weeks income, Underwriters should be reviewing the income tax returns submitted to verify that there are no unexplained and/or unacceptable differences between current income and past income. Examples below not intended to serve as exclusive methodology. compliance office with questions regarding individual cases. Please contact the Please note that the income reported for MCC program income calculation CAN NEVER BE LOWER THAN THE INCOME USED TO QUALIFY FOR CREDIT PURPOSES. Hourly Employees For the tax year in which the loan is closing, use the Year to Date base income. If consistent, utilize the base to determine the balance of the year by 1. Using last 4 to 6 weeks' pay stubs, identify hourly rate of pay and average number of regular hours worked per week. Multiply hourly rate times regular weekly hours. Multiply result times number of weeks for balance of year and add to YTD for an annualized base salary. 2. If the person has no other sources of income (for example: overtime, bonus, commissions, second jobs, interest, dividends, child support, alimony, public assistance), this will be the current total annual income. 3. You should not find significant differences. In some cases, the current total annual income will be higher than the previous year's income. decreases in pay or number of hours worked. Salaried Employees Variances should be attributable to increases/ 1. Using last 4 to 6 weeks' pay stubs, identify weekly (or other frequency) rate of pay. Multiply rate times the number of regular pay periods in the year (52 weeks, 12 months, 24 semi-months) 2. If the person has no other sources of income (for example overtime, bonus, commissions, second jobs, interest, dividends, child support, alimony, public assistance), this will be the current total annual income. 3. Compare the total annual income in #2 above to paystubs, VOEs, previous year s income per W2s and tax returns. You should not find significant differences. In some cases, the current total annual income will be higher than the previous year's income. Variances should be attributable to increases/decreases in pay or number of hours worked. Business, Self Employment 1. Use the quarterly tax returns and financial statements to identify the current NET year to date income. 2. Divide the year to date income by the number of months during which it was earned and multiply times remaining number of months in year. Add to actual YTD. ADD DEPRECIATION. 3. If the person has no other sources of income (for example: overtime, bonus, commissions, second jobs, interest, dividends, child support, alimony, public assistance), this will be the current total annual income. 4. Compare the total annual income in #2 above to the previous year's income per W-2s and tax returns. You should not find significant differences.
17 El Paso County, Colorado MCC Program Page 17 Verified Termination of Overtime, Commission, Bonus, Seasonal, Periodic, One Time Overtime, Bonus, Commissions Using last 4 to 6 weeks' pay stubs, identify the year to date total earnings of the borrower. Subtract the current total base income (see above) to arrive at the total year to date extraordinary income. If verification of termination of overtime, commission or bonus is provided in writing (i.e. a letter from an employer) or such termination is due to a change of employment, use the current YTD overtime, commission or bonus, do not annualize and add as a lump sum to the current total annual income. Regular Overtime, Bonus, Commissions 1. Using last 4 to 6 weeks' pay stubs, identify the year to date total earnings of the borrower. Subtract the current total base income (see above) to arrive at the total year to date extraordinary income. 2. Divide the year to date extraordinary income by the number of pay periods during which it was earned (to obtain an average). Multiply times the appropriate factor (Balance of year weeks, months, semi-months, etc.) for balance of year figure and add to actual YTD extraordinary income for annual income. 3. If the person has no other sources of income (for example: second jobs, interest, dividends, child support, alimony, public assistance), this will be the current total annual income. 4. Compare the total annual income in #2 above to paystubs, VOEs, previous year s income per W-2s and tax returns. You should not find significant differences. In most cases, the current total annual income will be higher than the previous year's income. It will also generally be higher than the annualized year to date income. The variances should be attributable to increases/decreases in pay. Interest, Dividends 1. Use current earnings statements issued by the bank, investment broker or agent. Identify the year to date interest or dividend earnings. Divide by the investment term year to date (for an average) and multiply times appropriate factor to annualize the earnings. 2. If statements are not available, and the terms of the investment agreement are available, multiply the principal amount of the asset times the annual interest yield factor for a projected interest earnings amount. 3. If neither is available, use the previous year's earnings statements or tax returns to identify total annual interest and dividend income. If the assets are still invested in the same instruments, use the previous year's figure. 4. Add the result of the computation in either #1, #2 or #3 above to the Current Total Annual Income. Alimony, Child Support 1. Use the monthly amount appearing in the divorce decree, separation agreement or other support document. 2. If the borrower receives more than the amount stipulated in the agreements, use the monthly figure that the borrower declares and can be verified. 3. If the borrower receives less than the amount stipulated in the agreements and there is a verifiable history of the underpayments for at least 2 years (as evidenced by court records), then use the past 2 years' historical monthly earnings. If there is no such history that can be verified, use the amount stipulated in #1 above. 4. Multiply the monthly amount of alimony or child support times 12. Add to the current total annual income (plus any other income sources).
18 El Paso County, Colorado MCC Program Page 18 Pensions, Temporary Payments 1. Use the benefits statement issued by the benefits provider (pensions, workers compensation, disability compensation, social security, AFDC, etc.) to identify the amount of the benefit, payment frequency and expected term of the benefit. 2. Multiply the amount of the benefit times the payment frequency for the balance of year and add to actual YTD for an annualized amount. Add to the current total annual income (plus any other income sources). 3. If the benefit is absolutely not payable to the recipient beyond a given date (that means a complete and permanent stop of benefits without extensions, exceptions, waivers or other conditions) and such date is within 12 calendar months of the anticipated closing date, then calculate the benefits expected through the end of the benefits term. That will be the total annual income amount from the specific benefits source. Add to the current total annual income (plus any other income sources) Boarder s Income and Rental Income in One Unit Properties The boarder s wages/income and rental income paid to the borrower must be included in the MCC program calculation of income.
19 El Paso County, Colorado MCC Program Page 19 LIST OF PROGRAM COMPLIANCE FORMS COMPLIANCE FILE CHECKLIST This is the cover sheet for your compliance file for all loans. Use it as a guide in preparing the compliance file folder; the complete compliance file is to be sent to the Administrator within 10 days of closing. NOTICE OF POTENTIAL RECAPTURE Notice must be provided to borrowers prior to MCC registration and signed by all borrowers. Attach recapture brochure to borrower s copy. Lender s underwriter verifies that notices of potential recaptures has been signed. Send signed original in compliance file. RECAPTURE BROCHURE Attach to borrower s copy of notice of potential recapture. AFFIDAVITS/CERTIFICATION This document has three sections - applicant affidavit section for those in title whether or not an applicant to be signed at CLOSING and notarized; seller/builder affidavit section to be signed at CLOSING by all seller s named on real estate purchase contract and notarized; lender certification section to be signed by authorized representative of lender. Send signed original in compliance file. FINAL RECAPTURE FORM (aka MCC Final Recapture Notice) required by law is provided to the borrower at closing. The completed form prints out with the closing docs found online. The MCC will be sent via to the applicant at the end of the month following compliance approval. For those borrowers without an address, the MCC will be mailed via regular mail. Questions regarding forms may be directed to SIGNATURES ON MCC FORMS/DOCUMENTS The simple rule of who signs program forms if the person is named on the warranty deed, they sign the program forms. If they are not named, they do not sign the program forms. Also, remember cosigners cannot live in property, do not sign MCC documents or take title. Having people sign documents who should not sign is as incorrect as not having all sign who should. Under no circumstances may a cosigner s name appear on the Deed of Trust/Mortgage or Warranty Deed.
20 El Paso County, Colorado MCC Program Page 20 OTHER DOCUMENTS REQUIRED FOR MCC COMPLIANCE FILE Tax Transcripts (Tax returns filed for the preceding year are acceptable from Feb. 15 to April 15 From April 15 the past three years tax transcripts are required for all borrowers and spouses. Not required for those buying in Targeted Areas or those purchasing under the Veteran s Exception. Extensions are not acceptable in lieu of tax transcripts. Real Estate Purchase Contract Requests for The full address of the property, full names of all sellers and buyers, total purchase price of the property must be included. If there is not an address for new construction, a lot number and subdivision name are required. All named persons must sign. Include the name and title whenever a representative is signing for a corporation. Final Typed Loan Application (1003) The typed application signed and dated by all parties is required. Loan interviewer must complete and sign page 3 of 4 of the If this is not possible, then an officer must sign in place of the interviewer. All persons taking title to the property must execute all MCC documents. The income disclosed on the Affidavit must be the same or more than that shown on the The purchase price, loan amount, and other financial details must be the same as shown on all other documents. HUD-1 Settlement Statement Buyer, seller and closing agent must fully execute the HUD-1. Borrowers on the HUD-1 must be all persons taking title to the property and match the Affidavit and application. Persons not taking title to the property may not appear or sign the HUD-1. personal property or satisfy other debts. Warranty Deed A copy of the Warranty Deed is required. Proceeds of this loan may not be used to purchase Discharge Papers For Veterans obtaining a Qualified Veteran s Loan, a copy of their discharge papers.