ATTM C - SC HOMEBUYER PROGRAM GUIDE - CONSOLIDATED.pdf

Mortgage Credit Certificate Program Guide – Series 2018A (12/21/2018) 1875145v5

SOUTH CAROLINA STATE HOUSING FINANCE

AND DEVELOPMENT AUTHORITY

MORTGAGE CREDIT CERTIFICATE

PROGRAM GUIDE

South Carolina State Housing Finance and Development Authority 300-C Outlet Pointe Blvd. Columbia, South Carolina 29210

(803) 896-9001 Website: www.schousing.com

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TABLE OF CONTENTS

Page

SECTION 1 INTRODUCTION

SECTION 2 ELIGIBILITY GUIDELINES

Section 2.1 Eligible Holder Requirements Section 2.2 Property Requirements Section 2.3 Financing Requirements

SECTION 3 LENDERS

Section 3.1 Lender Qualifications Section 3.2 Lender Responsibilities Section 3.3 MCC Processing Fees Section 3.4 Record Retention and IRS Reporting

SECTION 4 MCC PROCESSING STEPS

Section 4.1 General Section 4.2 MCC Origination Section 4.3 MCC Submission Package Section 4.4 Lender Closing Package Section 4.5 Construction-to-Permanent Transactions

SECTION 5 PROGRAM COMPLIANCE

Section 5.1 Submitting Federal Income Tax Returns Section 5.2 If Signed Federal Income Tax Returns Are Not Available Section 5.3 Changes in Eligible Holder Status Section 5.4 Modification of MCCs Section 5.5 Penalties

SECTION 6 REFINANCING GUIDELINES

Section 6.1 How It Works Section 6.2 Refinancing Requirements Section 6.3 Certified Indebtedness Amount

SECTION 7 TAX INFORMATION/RECAPTURE

Section 7.1 Disclaimers Section 7.2 Eligible Holder Program Information Section 7.3 Recapture

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Appendix A Defined Terms

Appendix B Forms for Mortgage Credit Certificate Program

SC MCC-101 MCC Submission Package Checklist SC MCC-102 Underwriter Data Summary and Approval SC MCC-103 Request for Conditional Commitment SC MCC-104 Trustee Certification for Application SC MCC-105 Seller Affidavit SC MCC-106 Applicant Program Certifications SC MCC-107 Preliminary Notice to Applicants of Potential Recapture of Federal Subsidy SC MCC-108 Request for Transcript of Tax Return (IRS Form 4506-T) SC MCC-109 Federal Income Tax Affidavit SC MCC-110 Owner Occupancy Certification SC MCC-111 Declaration of Citizenship Status SC MCC-200 MCC Lending Partner Application SC MCC-201 Lender Participation Agreement SC MCC-203 IRS Form 8329 SC MCC-300 Closing Package Checklist SC MCC-301 Eligible Holder/Co-Occupant Closing Affidavit SC MCC-302 Lender Closing Affidavit SC MCC-303 Recertification of Income SC MCC-304 Notice to Eligible Holder of Potential Recapture of Federal Subsidy SC MCC-305 Notice of Maximum Recapture Tax and Method to Compute Recapture Tax on Sale of Home SC MCC-306 Conditional Commitment SC MCC-307 Request for MCC Modification SC MCC-400 Federal Income Tax Worksheet SC MCC-401 Income Calculation Worksheet SC MCC-402 Calculation of Business Use Worksheet SC MCC-403 Mortgage Credit Certificate Tax Credit Worksheet SC MCC-500-PUR Mortgage Credit Certificate Form – Purchase SC MCC-500-REISSUE Mortgage Credit Certificate Form – Reissue

Appendix C Targeted Areas

Appendix D MCC Program Fees

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SECTION 1

INTRODUCTION

DEFINITIONS RELATING TO DEFINED TERMS CONTAINED IN THIS PROGRAM GUIDE ARE CONTAINED IN

APPENDIX A—DEFINED TERMS.

Purpose

The purpose of this Program Guide is to describe the MCC Program as established by the Authority. It also will identify the respective roles of the Authority, the Lender, the Eligible Holder and the Seller.

MCC processing documents and other forms are included for reference.

Mortgage credit certificate programs such as the MCC Program were authorized by Congress in the 1984 Tax Reform Act. The MCC Program is intended to comply with the requirements of Section 25 of the Code and the Treasury Regulations promulgated thereunder. The MCC Program permits Lenders to offer MCCs, subject to MCC Program guidelines, to Eligible Holders. Lenders will be given the opportunity to enter into a Lender Participation Agreement (SC MCC-201) with the Authority and a list of Lenders will be maintained on the Authority’s web site1.

The Mortgage Credit Certificate (MCC)

An MCC allows an Eligible Holder to claim a federal income tax credit. The MCC reduces an Eligible Holder’s federal income taxes and, in effect, creates additional disposable cash resources for the Eligible Holder to be used for any purpose. The Authority offers a 50% federal income tax credit amount, up to a maximum of $2,000 annually. 2 For example, an Eligible Holder with a loan amount of $100,000 at an interest rate of 6% for 30 years pays approximately $6,000 of interest in the first year. With a 50% MCC, this Eligible Holder receives a direct federal income tax credit of $2,000 (50% x $6,000 = $3,000;

however, the maximum federal income tax credit amount is $2,000 annually). The Eligible Holder can reduce the amount of monthly federal income tax withheld by filing a revised IRS Form W-4 Employee’s Withholding Allowance Certificate in order to have more disposable cash resources to be used by the Eligible Holder for any purpose.3

The annual benefit to the Eligible Holder will be the lesser of the federal income tax credit amount or the amount of federal income taxes owed after all other credits and deductions have been taken. The maximum federal income tax credit amount is $2,000 annually.4 The MCC is good for the life of the loan as long as the Eligible Holder occupies the property as his/her Principal Residence.5 Should he/she cease to occupy the property as his/her primary Principal Residence, the MCC is revoked, and in some circumstances, a portion of the credit taken in prior years will be subject to inclusion in the taxable income of the Eligible Holder in the year the Eligible Holder ceases to occupy the property.6 See Section 7.

An MCC cannot be issued to an Eligible Holder who is assuming an existing mortgage that was not previously financed with an MCC.7 An MCC cannot be used with a loan that is financed by an Authority tax-exempt qualified mortgage revenue bond or a tax-exempt qualified Veterans’ mortgage bond.8

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The Authority

The Authority was created in 1971 as a public body corporate and politic and as an agency of the State by an amendment to the Housing Authorities Law of South Carolina. The Authority was vested with the rights, powers, and duties held by local housing authorities within the State, including the right and power, among other things, to investigate housing conditions, to acquire, own, and lease personal property, to construct, reconstruct, and operate housing developments, to borrow money and issue bonds and, generally, to aid in planning and constructing low income rental housing developments.

Statutes were enacted in 1974 and 1976 to expand the powers of the Authority. Such statutes, however, were declared unconstitutional by the South Carolina Supreme Court, initially because they permitted the use of State tax revenues for the payment of the Authority’s bonds and subsequently because certain provisions requiring legislative approval of the Authority regulations, held unconstitutional, could not be severed from the remaining legislation. The present Act, containing no such provisions, was enacted in 1977. The South Carolina Supreme Court upheld the constitutionality of the present Act on August 10, 1978, in Bauer v. South Carolina State Housing Authority, 246 S.E.2d 869 (S.C. 1978). By Act 538 enacted on May 18, 1988 the Authority’s name was changed to the South Carolina State Housing Finance and Development Authority.

The Authority has office hours between 8:00 a.m. and 5:00 p.m., Monday through Friday. The telephone number is (803) 896-9001 and the FAX number is (803) 551-4938. The Authority’s mailing address for documents is:

South Carolina State Housing Finance and Development Authority Attn: MCC Program 300-C Outlet Pointe Blvd.

Columbia, South Carolina 29210

The Program Guide, which includes forms, can be obtained by accessing the Authority’s Lender web portal, Lender Online, at https://lol.schousing.com.

Lenders must use the Lender Online system to review the status of an MCC. It can be accessed via https://lol.schousing.com.

THE MATERIAL CONTAINED IN THE PROGRAM GUIDE (INCLUDING ANY ATTACHMENTS) IS TO ASSIST THE ELIGIBLE HOLDER IN UNDERSTANDING THE EFFECT OF THE MCC ON THE ELIGIBLE HOLDER’S FEDERAL

INCOME TAXES. THE INFORMATION CONTAINED IN THE PROGRAM GUIDE (INCLUDING ANY

ATTACHMENTS) WAS DRAFTED BY THE AUTHORITY AND ITS COUNSEL AND INFORMATION PROVIDED HEREIN IS TAKEN FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS NOT NECESSARILY COMPLETE AND THE ACCURACY OF THE PROGRAM GUIDE (INCLUDING ANY ATTACHMENTS) CANNOT BE GUARANTEED.

ANY INFORMATION PRESENTED IN THE PROGRAM GUIDE (INCLUDING ANY ATTACHMENTS) IS SUBJECT TO CHANGE WITHOUT NOTICE. THE INFORMATION CONTAINED IN THE PROGRAM GUIDE (INCLUDING ANY ATTACHMENTS) OR ON ANY RELATED LINKS OF THE AUTHORITY IS PRESENTED FOR DISCUSSION PURPOSES TO BE USED BY A TAXPAYER AND HIS OR HER OWN PERSONAL TAX ADVISOR. SOME OF THE MATERIAL CONTAINED IN THE PROGRAM GUIDE (INCLUDING ANY ATTACHMENTS) IS COMPLICATED. AS

SUCH, TAXPAYERS AND THEIR ADVISORS MAY UTILIZE THE INFORMATION CONTAINED IN THE

PROGRAM GUIDE (INCLUDING ANY ATTACHMENTS) AT THEIR OWN RISK AND FOR DISCUSSION

PURPOSES ONLY. TAXPAYERS ARE ADVISED TO RETAIN THEIR OWN TAX AND INVESTMENT ADVISORS AND SHOULD NOT RELY ON THE INFORMATION CONTAINED IN THE PROGRAM GUIDE (INCLUDING ANY

ATTACHMENTS) WITHOUT THE GUIDANCE OF APPROPRIATE COMPETENT COUNSEL.

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SECTION 2

ELIGIBILITY GUIDELINES9

Lenders must review the Eligible Holder Requirements in Section 2.1 and Property Requirements in Section 2.2 below to ensure the eligibility of a potential Eligible Holder.

Section 2.1 Eligible Holder Requirements

As with any conventional mortgage loan program, the Eligible Holder must meet credit and underwriting criteria established by the Lender. To qualify for an MCC, an Eligible Holder must also meet the following requirements which are based on the applicable federal and state regulations:

(a) The Eligible Holder must possess an Ownership Interest in and occupy the residence as a Principal Residence within 60 days after loan closing.10 The Eligible Holder must notify the Lender and the Authority if he/she ceases to occupy the property as the Principal Residence. At that time, the MCC will be revoked and the Eligible Holder is no longer eligible for the MCC federal income tax credit.

(b) Neither the Eligible Holder nor the Co-Eligible Holder had a Prior Home Ownership Interest.11 12

There are two exceptions to this requirement: (i) the Principal Residence purchased is in a Targeted Area13; and (ii) the Eligible Holder and the Co-Eligible Holder are Veterans who purchase a home under a one-time exception allowance.14 The one-time exception is available for Veterans, defined as a person who served in active duty of the United States Armed Forces or Reserves, and who was discharged or released therefrom under conditions other than dishonorable.

Note: Even though an Applicant may be exempt from this requirement, the MCC Compliance Income and Acquisition Cost limits still apply.

(c) The Eligible Holder must meet Household Income limits for the MCC Program and Lenders must calculate income by using the procedures of this section. The income of both spouses or other occupant will be included in calculations to determine eligibility for participation in the MCC Program. The procedures described below are intended to calculate Compliance Income.15 The income limits can be found on the Lender Online system at https://lol.schousing.com.

All Household Income being earned as of the date of the loan application will be counted when underwriting and determining Compliance Income with respect to an MCC.16 Income calculations for compliance underwriting are different from qualifying income calculations for mortgage loan credit underwriting (i.e., FHA, VA, USDA, Conventional).17 Lenders should always ask the Applicants to disclose their current base income (before any payroll deductions). Current base income includes income from primary and part-time jobs at the time of application and also all other income that the Applicants receive. This information must be used for compliance underwriting. All income is projected for 12 months to calculate Compliance Income (regardless of its likelihood to continue).

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The Lender should also ask the Applicant for specific other income. Examples include but are not limited to the following: alimony, annuities, auto allowance, bonuses, child support, commission, disability or death benefits, dividends, education benefits used for subsistence, interest, income received from business activities or investments, income received from trusts, inheritances (if received on a continuous basis), insurance policies (if received on a continuous basis), net rental income, overtime, pensions, public assistance, recurring monetary contributions regularly received from persons not living in the unit, royalties, severance pay, shift differential, sick pay, social security benefits, special pay and allowances of a member of the armed forces (excluding hazardous duty pay), tips, unemployment benefits, VA compensation and workers compensation.

Read further for more specific details on certain types of Compliance Income. Types of income not listed in this Program Guide but disclosed by Applicants should also be counted. Contact the Authority with specific questions.

• Salaried Base Pay. The Lender will use each Applicant’s verified gross annual income for calculation of Compliance Income for salaried Applicants. When the verified gross income disclosed does not agree with the gross income on the Applicant’s pay stub, the Lender’s file must be documented with the gross income that was applicable at the time of MCC application and an explanation should be in the Lender’s file stating why there is a variance.

Verifications of employment are used to determine the Compliance Income of a salaried Applicant. The Lender must compare the current annual salary with year-to-date earnings and with the Applicant’s current pay stubs to note any discrepancies.

Lender should investigate discrepancies and document the file appropriately.

• Self-Employment Income – More than two years. The Lender must calculate gross annual income for self-employed Applicants by averaging the reported net income for the previous two calendar years’ Federal Income Tax Materials and year-to-date income. Year-to-date earnings will be taken from a current, signed year-to-date (based on most recent quarter) profit and loss statement (may be self-prepared).

Example:

2017 net earnings from Schedule C (12 month period) $ 33,000.00 2018 net earnings from Schedule C (12 month period) $ 38,000.00 2019 net earnings for 9 months from profit and loss statement

$ 36,000.00

2017 earnings $ 33,000.00 2018 earnings + 38,000.00 2019 year-to-date earnings + 36,000.00 = $107,000.00

$107,000 ÷ 33 months = $3,242 x 12 months = $ 38,904.00

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If the sum of the self-employed income from the past two years and year-to-date equals a negative income figure, the Lender should treat the sum as a $0 for the purpose of calculating Compliance Income.

• Self-Employment Income - Less than two years. If the Applicant has been self-employed for less than two years, the Applicant must submit to the Lender, in addition to personal Federal Income Tax Materials, a current, signed year-to-date (based on most recent quarter) profit and loss statement (may be self-prepared).

The Lender must calculate gross annual income by averaging the reported net income from the most recent calendar year Federal Income Tax Materials and/or the current, signed year-to-date profit and loss statement for the period of time that the Applicant has been self-employed.

If the sum of the self-employed income from the past year and year-to-date equals a negative income figure, the Lender shall treat the sum as a $0 for the purpose of calculating Compliance Income.

The partnership or corporate federal income tax return, together with all schedules, must be submitted with the MCC application if the Applicant is a 25% or greater partner in a partnership or has a 25% or greater interest in a small corporation (i.e., assets of one million dollars or less).

If the Federal Income Tax Materials indicate that the Applicant was self-employed, full time or part time in the prior year, the Applicant must provide a signed statement indicating he/she is no longer self-employed. The statement should verify that the last date of self-employment ceased prior to the date of the application.

• Part-Time Salary Income. Part-time salary income must be included when calculating the Applicant’s gross annual income if the Applicant is employed at a part-time job at the time of MCC application. It is considered current income.

The Lender must calculate income based on what the Applicant is making at the time of MCC application if the part time employer verifies a specific hourly rate and gives the specific number of hours worked (or states the monthly amount). The Lender must ensure that year-to-date figures equal this amount. If not, the file must be documented as to the reason for the discrepancy. If the part-time employer does not state a specific hourly rate and gives the specific number of hours worked (or states the monthly amount), the Lender must average past year and year-to-date earnings and project the income on an annual basis.

Example:

Part-time employer states $7.50 per hour for 15 hours per week and the year-to-date figures verify this.

$7.50 hourly rate x 15 hours x 52 weeks = $5,850 annual income.

Part-time employer states $7.50 per hour but does not state the hours worked.

The date of employment was February 19, 2018, and the date of verification of employment was October 22, 2018. The year-to-date earnings were $3,806. The

1875145v5 Page 6 number of weeks between from February 19, 2018 and October 22, 2018 is 35 weeks.

$3,806 year-to-date earnings ÷ 35 weeks x 52 weeks = $5,655 annual income.

• Part-Time Self-Employed Income. The Lender must use the self-employed income method to calculate compliance income if the Applicant is self-employed on a part-time basis at the time of MCC application in addition to full time salaried employment. This can be detected when the Federal Income Tax Materials are reviewed. The part time self-employment income is calculated in the same way as when the Applicant is self-employed on a full time basis.

When Federal Income Tax Materials indicate a history of self-employment and the Applicant indicates that he/she no longer works the self-employment job, the Lender must submit a signed statement from the Applicant verifying when the self-employment ceased.

• Commission Income. Income for an individual earning through commissions will be calculated as it is for a self-employed Applicant (past two years and year-to-date average).

Income for commissions received in addition to a base salary (or a “guaranteed” draw) is treated as “other income”. Average commissions earned during the past year and year-to-date are used to project commission income.

• Bonus and Overtime Income. The Lender must average past year and year-to-date bonus and/or overtime income. If the Applicant was not employed full time for twelve months during the past year, the Applicant’s income should be averaged using the applicable number of months.

• Dividends and Interest Income. The Lender must average past year and year-to-date dividend and interest income. The Federal Income Tax Materials will indicate dividend and interest income received for the prior tax calendar year. The Applicant should furnish copies of bank statements, or other documentation to substantiate year-to-date dividend and interest income.

• Child Support and Alimony Income. The Lender should request a copy of the Applicant’s recorded Separation Agreement and/or Divorce Decree. If there are no recorded or filed copies of the Separation Agreement and/or Divorce Decree, the Lender must submit a copy of the recorded Separation Agreement and/or Divorce Decree before the Authority will issue a Conditional Commitment (SC MCC-306) approval.

The Lender must use the monthly amount of child support or alimony indicated in the recorded Separation Agreement and/or Divorce Decree. In the event there is no recorded Separation Agreement and/or Divorce Decree or other legal agreement verifying child support, the issue of child support must be addressed by having the occupant complete the applicable questions in the Child Support Income Certification section on the Applicant Program Certifications (SC MCC-106).

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• Social Security Income. The Lender must annualize gross benefits based on the benefit letter from the Social Security Administration. Social Security benefits include payments received by adults on behalf of minors for their own support.

• Other Income Excluded. The following types of income can be excluded in determining Compliance Income of an Applicant’s income eligibility for the MCC Program:18amounts of educational scholarships paid directly to the student or to the educational institution; amounts paid by the federal government to a Veteran for use in meeting the costs of tuition, fees, books and equipment; amounts that are specifically for reimbursement of business and/or educational expenses; one-time sign-on bonus; lump sum additions to family assets, such as inheritance, insurance payments (including payments under health and accident insurance and workmen’s compensation), capital gains, and settlement for personal or property losses;

payments received for the care of foster children; sporadic or irregular gifts; and amounts that are specifically for or in reimbursement of the cost of medical expenses.

(d) Verification, Changes & Recertification

The Lender should review copies of the verification of employment (written or verbal, most recent calendar year IRS Form W-2s, pay stubs and copies of additional income verifications to substantiate income calculations, for example, social security award letter, retirement, National Guard or Reserve income, child support, etc.). The pay stub must clearly indicate all sources of income (i.e., shift differential, overtime, etc.) and verify total year to date earned income. If the employer does not issue pay stubs it will be necessary to obtain a copy of the latest payroll ledger on company letterhead, signed by a company official.

The Applicant must submit a complete copy of the most recent calendar year IRS Form W-2s. The sum of the IRS Form W-2s must match the Federal Income Tax Materials. No IRS Form W-2s are required for the two previous years. The Lender must document the employment dates for all employers represented on the most recent Federal Income Tax Materials. Verbal verification of employment is acceptable.

The Lender should consult the Authority prior to submitting the underwriting file regarding future employment (e.g., full-time student not employed at time of application, but for whom an employer has promised a job position), changes in employment (e.g., Applicant relocating and changing jobs), and pay structure changes (e.g. Applicant is going from a commissioned job to straight salary, or part-time to full-time) for a Compliance Income determination.

In the case of an Applicant beginning his/her job after the date of closing, the requirements differ (see below) depending on the amount of cash reserves left after closing. In all cases, the Lender must review documentation from the new employer stating the amount of employment income and the beginning employment date.

If the Applicant does not have sufficient cash reserves left after closing to make all of the mortgage payments prior to his/her receipt of the first paycheck, the Applicant must submit a copy of the first pay stub prior to issuance of the MCC.

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If the Applicant does have sufficient cash reserves left after closing to make all of the mortgage payments prior to the receipt of his/her first paycheck, no further documentation is required.

If the loan is scheduled to close 120 days or more after the period ending date of the latest pay stub, the Applicant’s income must be verified again by the Lender and a Recertification of Income (SC MCC-303) form must be submitted to the Authority prior to closing. The Lender must receive a new updated pay stub (or payroll ledger) reflecting current year-to-date earnings for salaried employees and a more current profit and loss statement for a self-employed Applicant. Other income must be verified again by the Lender as well as the Applicant’s base income.

Section 2.2 Property Requirements

The Acquisition Cost of a home financed with the assistance of an MCC cannot exceed the established limits for State properties. Acquisition Cost is generally based on the sales price. The limits for Acquisition Cost are subject to change and can be found on the Lender Online system located at https://lol.schousing.com.19

The residence must be located in the State20 and must be eligible for insurance under the FHA, VA, USDA or Conventional Loan guidelines.

Some living units include Unfinished Square Footage. The cost to finish this space, whether or not the work is actually to be done, must be added to the sales price to arrive at the Acquisition Cost.21

The Lender may use the appraiser’s cost estimation for completion. The Request for Conditional Commitment (SC MCC-103) and the Seller Affidavit (SC MCC-105) must include this cost.

The Lender reviews a copy of the appraisal for compliance underwriting.

Property Types Allowed

• Single Family Detached Homes

• Condominiums/PUDs approved by Fannie Mae or Freddie Mac, or insurer (FHA, VA, or

USDA)

• Townhomes

• Any Manufactured Home (Mobile Home) eligible for insurance under FHA, VA, USDA or

Conventional Loan guidelines

For any properties involving more than two acres or an additional lot, the MCC Submission Package needs to include documentation verifying the additional land or lot is needed to reasonably maintain the basic livability of the residence or cannot be sub-divided and built on. The documentation will be reviewed by the Authority to determine acceptability prior to approval of the MCC.

No more than 15%22 of the total area of the Principal Residence can be used for:

• The principal place of business for, or in connection with, any trade or business on an exclusive and regular basis.23

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• A place of business that is used exclusively and on a regular basis for the purpose of meeting or dealing with patients, clients or customers in the normal course of trade or business.24

• A place that is used on a regular basis where the inventory is held for use in the trade or business of selling products at wholesale or retail but only if the residence is the sole fixed location of such trade or business.25

• Rental to any person for a period in excess of 15 days in any calendar year. This includes rental to a roommate. Roommate rental is assumed to be using more than 15% of the residence for business purposes.26

• A place that is used on a regular basis in the trade or business of providing day care for children, or for individuals who have attained the age of 65 years, or for individuals who are physically or mentally incapable of caring for themselves.27

The mortgage loans are also subject to the FHA 203(b) maximum mortgage limits.28

An appraised value (excluding closing costs) that exceeds 115% of the sales price must include documentation verifying why the property is being sold below market value. Documentation will be collected by the Lender and reviewed for acceptability by the Authority on a case-by-case basis.

Section 2.3 Financing Requirements

(a) Underwriting Standards. For loans involving MCCs, underwriting standards are modified to recognize the benefit of the MCC derived from the federal income tax credit. The secondary mortgage market and the mortgage insurance industry have established underwriting policies for loans involving MCCs.

(b) New Mortgage Loan Requirement. An MCC cannot be issued in connection with an assumption of an existing mortgage loan. However, an MCC can be used in connection with the replacement of construction loans. The term of any applicable construction loan must be 24 months or less.

Construction-to-permanent loans may utilize the MCC Program. The federal income tax credit is based on the modified (permanent) rate and is used only for the mortgage interest on the permanent loan. The MCC will be dated the date of conversion.

(c) Loans Not Eligible for an MCC. An MCC cannot be used in connection with a qualified mortgage revenue bond, a qualified Veterans’ mortgage bond, a Federal Housing Administration (FHA) 203(k) Program loan or with a USDA 502 Direct loan. The Lender must obtain from the Applicant, in the MCC Affidavits, a statement that no portion of the financing is from a qualified mortgage revenue bond, a qualified Veterans’ mortgage bond, an FHA 203(k) Program loan or from a USDA 502 Direct loan.

(d) Subordinate Financing. An MCC can only be a component of the first mortgage financing.

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Example:

1st Mortgage = $90,000 2nd Mortgage = $10,000

MCC benefit is based on the $90,000 first mortgage loan amount only. The benefit does not apply to subordinate liens (i.e. the $10,000 second mortgage loan amount in this example).

(e) Assumption of MCC - Assisted Mortgage Loan 29 An existing MCC may not be assumed by a new Eligible Holder.

SECTION 3

LENDERS

Section 3.1 Lender Qualifications30

Lenders are encouraged to have the following attributes:

(a) Are approved as a Fannie Mae or Freddie Mac seller/servicer in good standing (if originating Conventional Loans);

(b) Are approved as an FHA mortgage originator (if originating FHA loans);

(c) Are approved as a VA mortgage originator (if originating VA loans);

(d) Are approved as a USDA mortgage originator (if originating USDA loans);

(e) Have an office located in the State that has originated residential mortgages for at least one year;

(f) Are capable of originating, processing, underwriting, closing and funding the loan;

(g) Are in compliance with applicable minimum capital requirements imposed by federal banking laws and regulations;

(h) Are not under supervisory control of, or subject to, enforcement proceedings by federal banking regulators with respect to any violations or alleged violations of federal banking laws or regulations; and

(i) Have executed an MCC Lending Partner Application (SC MCC-200) and a Lender Participation Agreement (SC MCC-201) and remitted the required Lender fees set forth therein.

Section 3.2 Lender Responsibilities

The MCC Program is available on a loan-by-loan, first-come, first-served basis.

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The Authority offers a lock-in period equal to the shorter of 90 days or the expiration of the second year following the year in which the Authority elected to issue the series of MCCs. The Authority will establish the applicable lock-in period upon submittal through the Lender Online system The applicable lock-in period shall be made available to the Lender via the Lender Online system. The Lender must submit the MCC Submission Package to the Authority in accordance with Section 4.4 within 30 days of the expiration date.

Section 3.3 MCC Processing Fees

The Authority charges a non-refundable MCC processing fee of $500. Any party can pay the fee for the transaction; however, the Authority must be paid by a Lender check from an account of the Lender or by certified check with the MCC Submission Package. The Lender may charge up to an additional amount of $300. If the MCC Submission Package is delivered later than 30 days after the expiration date of the applicable lock-in period, mandatory extension fees will be charged.

The Authority will charge a $50 late fee, per month, for all incomplete files. The Lender must use procedures which will ensure accurate closing documentation is received in order for the Authority to disclose the Notice to Eligible Holder of Potential Recapture of Federal Subsidy (SC MCC-304).

A complete listing of all fees is set forth in Appendix D. All fees are waivable by the Authority in its sole discretion. None of the fees imposed on the Lender can be reimbursed by the Applicant.

Section 3.4 Record Retention and IRS Reporting31

The Authority will perform random post issuance reviews of Lender records pertaining to MCCs.

Therefore, the Lender is required to maintain a copy of the entire MCC Submission Package, all of the information described in Section 4.3 and all supporting documents for a period of 36 months.

The Lender must retain for six years for IRS purposes32 (i) the name, address, and social security number of the Eligible Holder; (ii) the name, address, and Taxpayer Identification Number of the issuer of the MCC (i.e. the Authority); and (iii) the loan date, Certified Indebtedness Amount and credit rate.

The Lender must file a report to the IRS each calendar year using IRS Form 8329 (SC MCC-203). The Authority will assist the Lender in preparing IRS Form 8329 (SC MCC-203) by furnishing a computer printout of all MCCs closed during the calendar year. This report is based on all MCC Submission Packages for which the Authority has received and issued an MCC. Remember that in order for this report to be accurate, the Lender must have all MCC Submission Packages on MCCs issued during the prior calendar year submitted to the Authority by January 15 in order for future MCCs to be issued.

SECTION 4

MCC PROCESSING STEPS

Section 4.1 General

The Authority will issue MCCs for eligible loans that are originated by Lenders. MCC eligibility includes compliance with federal and state requirements. Applicants apply for the MCC Program through an approved Lender. Lenders will reserve the MCC in Lender Online system located at https://lol.schousing.com. The Authority compliance review is done after the Lender’s regular

1875145v5 Page 12 underwriting procedures. If the loan meets the applicable compliance underwriting guidelines of the Lender, the Lender’s underwriter issues a loan approval, subject to the Authority’s approval of the MCC.

MCC Submission Packages should be submitted as early as possible to allow sufficient time for the Authority to review the file and for the Lender to make corrections. The Authority will review files on a first-come, first-served basis within three business days of receipt, if received during the 1st - 15th of the month or within five business days of receipt if received after the fifteenth of the month. This policy also applies to information submitted after the MCC Submission Package. The Authority will notify the Lender with approval or denial of the MCC.

Section 4.2 MCC Origination

The Authority requires all Applicants and Non-Borrower Occupants to sign Authority MCC documents.

The Authority does not allow a power of attorney to be used for the Affidavits. The Compliance Certification for Non-Borrower Occupant on the Applicant Program Certifications (SC MCC-106) form must be properly executed by a spouse or other adult who will be residing in the property to be purchased. The Non-Borrower Occupant must execute all Authority documents.

The Authority recognizes that there are procedural variations among Lenders; consequently, the procedures outlined here only suggest the sequence of events.

(a) Applicant reviews MCC Program Guide and schedules an appointment with a Lender.

(b) Lender determines if an Applicant is eligible for the MCC Program based on preliminary information for Household Income derived from the Income Calculation Worksheet (SC MCC-401), Acquisition Cost derived from the Request for Conditional Commitment (SC MCC-103) and Prior Home Ownership Interest derived from the Request for Conditional Commitment (SC MCC-103).

(c) If the preliminary screening indicates that the Applicant is a potential Eligible Holder, the Lender takes a formal application through the Lender Online system located at https://lol.schousing.com. The Lender obtains normal information, as well as Federal Income Tax Materials for the previous three calendar years (except for cases in Targeted Areas or which meet the Veterans’ exemption, in which case the Lender obtains only the previous calendar year’s Federal Income Tax Materials), and provides to the Applicant the Preliminary Notice to Applicants of Potential Recapture of Federal Subsidy

(SC MCC-107).

If mortgage interest or real estate taxes are shown on Federal Income Tax Materials, the Applicant must write a letter of explanation as well as furnish sufficient documentation to support the explanation. See Federal Income Tax Worksheet (SC MCC-400) for tips on reviewing Federal Income Tax Materials.

(d) After the application has been taken, the Lender will access Lender Online system https://lol.schousing.com and input the reservation information by completing the Lender Online system reservation request.

The Authority maintains a current cumulative total of reserved MCCs and is limited by law to a specific amount of MCC federal income tax credits that can be allocated to

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Eligible Holders. Lenders should promptly advise the Authority of reservation cancellations on Applicants when loans are withdrawn.

(e) Lender obtains a recorded Separation Agreement and/or Divorce Decree if the Applicant or Co-Applicant has been married within the last three years or receives alimony or child support. The recorded document must state the Applicant is able to purchase real estate without intervention of the other party to obtain clear title to the property. The Applicant should contact an Authority underwriter if he/she has any questions.

If a previous spouse owned a home prior to the marriage and the Applicant only had a marital interest, the Authority would need documentation verifying that the Applicant has not had a Prior Home Ownership Interest. Acceptable documentation would include a 3-year title search on the marital home.

(f) Lender verifies that the Applicant’s Household Income derived from the Income Calculation Worksheet (SC MCC-401), Acquisition Cost derived from the Request for Conditional Commitment (SC MCC-103), and Prior Home Ownership Interest derived from the Request for Conditional Commitment (SC MCC-103) requirements are met.

Applicant’s income must be verified again if the loan closes 120 days after the period ending date of the latest pay stub.

(g) Lender obtains the Applicant(s) signature(s) on the Request for Transcript of Tax Return (IRS Form 4506-T) (SC MCC-108) and the Applicant Program Certifications (SC MCC- 106), as part of the Authority’s quality assurance program. Both forms must also be dated.

(h) Lender completes the verification process and the Applicant signs and dates the Request for Conditional Commitment (SC MCC-103). The Request for Conditional Commitment (SC MCC-103) includes the following requirements:

(i) Certification that the residence will be used as the Applicant’s Principal Residence within 60 days after the day of loan closing.

(ii) Certification that the Applicant has not had a Prior Home Ownership Interest.

This is not required for the purchase of a home in a Targeted Area or where the Applicant meets the Veterans’ exemption.

(iii) Certification that the Acquisition Cost does not exceed the Acquisition Cost limits.

(iv) Certification that the Applicant’s gross annual income does not exceed permitted income limits.

(v) Certification that no mortgage interest from the loan is being paid to a Related Person.

(vi) Acknowledgment that any material misstatement or fraudulent statement is made under penalty of perjury.

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(i) Lender completes the Seller Affidavit (SC MCC-105) and obtains the Seller’s notarized signature. Be aware of the following requirements on the Seller’s signature.

(i) All Sellers must sign the Seller Affidavit (SC MCC-105). The Authority is unable to accept a power of attorney. A relocation company is authorized to sign a Seller Affidavit (SC MCC-105). Active duty military personnel will be reviewed on a case by case basis.

(ii) If signed by a company official, the signature line must include the name of the selling company and the title of the individuals signing the Seller Affidavit

(SC MCC-105).

(iii) If the Seller Affidavit (SC MCC-105) is executed by an estate, the Authority must have a copy of the signed and stamped Certificate of Appointment appointing the Personal Representative of the estate. The Certificate of Appointment can be obtained by the Personal Representative or from the county probate court.

(iv) Acknowledgment that any material misstatement or fraudulent statement is made under penalty of perjury.

(j) Prior to submitting the file to the Lender’s underwriter, the processor should enter the appraisal, credit data information and print the Underwriter Data Summary and Approval (SC MCC-102) form. The Underwriter Data Summary and Approval (SC MCC-

102) form is included in the MCC Submission Package to the Lender’s underwriter and to the Authority.

(k) For all loans, the Lender’s underwriter must review the file for MCC compliance issues.

Once satisfied all industry underwriting and MCC compliance requirements have been met, the Lender’s underwriter must sign the Underwriter Data Summary and Approval (SC MCC-102) form at the bottom left hand side. The Lender issues its approval, subject to the Authority’s approval of the MCC.

(l) After the loan is approved by the Lender’s underwriter, an MCC Submission Package is sent to the Authority. The MCC Submission Package Checklist (SC MCC-101) should be included in the MCC Submission Package. See Section 4.3 for more information.

Note: The Underwriter Data Summary and Approval (SC MCC-102) form must be signed by the Lender’s underwriter in all cases prior to the Authority’s review of the MCC Submission Package.

(m) Lender will close the loan only after Authority approval of the MCC. A loan must never be closed prior to the Authority’s approval of the MCC, or the Applicant will not qualify for an MCC. The Authority does not allow dry closings.

(n) Lender must submit a completed MCC Submission Package to the Authority for review within 30 days of the expiration date of the lock-in period established on the Lender Online system.

(o) The Authority will issue an MCC and forward a copy of it to the Lender upon review and approval of the MCC Submission Package.

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(p) The Authority will mail the Notice of Maximum Recapture Tax and Method to Compute Recapture Tax on Sale of Home (SC MCC-305) to the Eligible Holder within 90 days of loan closing, along with the MCC Certificates.

(q) A $50.00 late fee, per month, will be collected from the Lender if the Authority does not receive the MCC Submission Package or additional corrections within 30 days from the expiration date. This fee cannot be collected, directly or indirectly, from the Applicant.

Section 4.3 MCC Submission Package

Once the loan is approved by the Lender’s underwriter, the Lender forwards to the Authority an MCC Submission Package consisting of the following documents in a folder in the order specified:

1. MCC Submission Package Checklist (SC MCC-101) (original);

2. Agency Underwriting and Transmittal Summary

• FNMA 1008, FHA 92900LT or a VA Loan Analysis

3. Request for Conditional Commitment (SC MCC-103) (original)

4. Verification of employment and current pay stubs on all Eligible Holders and income receiving occupants; pay stubs must cover most recent 30-day period and contain year to date (YTD) totals

5. Verification of prior employment to match the most recent calendar year’s IRS Form W-2s, IRS Form 1099s and/or IRS Form K-1s (all income receiving occupants)

6. Signed Seller Affidavit (SC MCC-105) (original)

7. Income Calculation Worksheet (SC MCC-401) and Calculation of Business Use Worksheet (SC MCC-402), if applicable

8. Mortgage Credit Certificate Tax Credit Worksheet (SC MCC-403)

9. Unless otherwise noted in program documentation, copy of three most recent Federal Income Tax Materials with all schedules and IRS Form W-2s, IRS Form 1099s and/or IRS Form K-1s for all income receiving household occupants (except for cases in Targeted Counties or which meet the Veterans’ exemption – only the current year Federal Income Tax Materials are required)

10. Federal Income Tax Worksheet (SC MCC-400)

11. Federal Income Tax Affidavit (SC MCC-109) – applicable if closing occurs between January 1 and February 15

12. Recorded Separation Agreement and/or Divorce Decree (copy) if applicable

13. Applicant Program Certifications (SC MCC-106), complete (original)

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14. Preliminary Notice to Applicants of Potential Recapture of Federal Subsidy (SC MCC-

107) (original)

15. Request for Transcript of Tax Return (IRS Form 4506-T) (SC MCC-108) (original)

16. Copy of executed sales contract

17. Copy of signed 1003 loan application

18. Declaration of Citizenship Status (SC MCC-111) must be executed for all household applicants including those under 18 years of age

The Authority reviews the MCC Submission Package for completeness and determines whether all necessary Affidavits are properly executed. Adequate time should be allowed between submission and when approval is required for the Lender to supply additional or corrected information.

Additional documentation must be received in a reasonable amount of time (normally two weeks) in order to issue an approval or denial.

If the MCC Submission Package is acceptable, the Lender is notified via email of the MCC approval which will include the Conditional Commitment (SC MCC-306).

The Conditional Commitment (SC MCC-306) states that the Authority will issue an MCC in a specified amount from the Lender on evidence of compliance with the MCC Program requirements and the closing of the mortgage loan. The Conditional Commitment (SC MCC-306) will reflect the percent of federal income tax credit to be issued.

Section 4.4 Lender Closing Package

Lender receives the executed Conditional Commitment (SC MCC-306) from the Authority. A loan should never be closed without the Authority’s Conditional Commitment (SC MCC-306). Conditions that need to be addressed prior to closing the loan will be listed on the bottom of the Conditional Commitment (SC MCC-306). Until these conditions are cleared by the Authority, the MCC will not be issued.

Lender closes the loan in the normal procedure making sure to obtain as part of the Lender closing package the following Authority Affidavits:

• Lender Closing Affidavit (SC MCC-302) - Please note that any Co-Applicant’s or Non- Borrower Occupant’s name must appear on the Lender Closing Affidavit. The Social Security number of all Co-Applicants must also be shown.

• Eligible Holder/Co-Occupant Closing Affidavit (SC MCC-301) - Please note that any Co- Eligible Holder’s or Non-Borrower Occupant’s name must appear on the Affidavit and all adult occupants must sign this form.

After loan closing, SC Housing requires submission of a Closed Loan Package. The following documentation must be submitted to SC Housing within 30 days of loan closing. Upon review of acceptable documentation the SC Mortgage Tax Credit Certificate will be mailed to the Eligible Holder and copy will be forwarded to the lender.

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• Closing Package Checklist (SC MC-300) (original)

• Lender check payable to the South Carolina State Housing Finance and Development Authority for the following fees:

o MCC Issuance Fee of $500 o MCC Extension Fee (if applicable) o MCC Modification Fee (if applicable)

• Eligible Holder check payable to the South Carolina State Housing Finance and Development Authority for the following fee:

o MCC Reissuance Fee of $250 if loan is a refinance

• Eligible Holder/Co-Occupant Closing Affidavit (SC MCC-301) (original)

• Lender Closing Affidavit (SC MCC-301)

• Recertification of Income (SC MCC-303) (original) if the loan closed more than 120 days after the date of the last paystub provided at the time of conditional approval

• Original Recapture Notice signed by Eligible Holder(s)

Section 4.5 Construction-to-Permanent Transactions

A construction-to-permanent loan is acceptable under the MCC Program. The Lender must be aware that the income verifications can be no older than 120 days prior to the conversion date. Recertification may be necessary. The Lender closing package must contain a copy of the executed conversion document for the loan. The federal income tax credit cannot be applied to the construction loan interest. The federal income tax credit can be used only on the interest after conversion or permanent financing of the loan is in place.

SECTION 5

PROGRAM COMPLIANCE

The Lender is responsible for ensuring the Eligible Holder’s compliance with various MCC Program requirements, including the first-time homebuyer requirement. The first-time homebuyer requirement does not apply if the residence purchased is in a Targeted Area or meets Veterans’ exemption requirements. Cosigners are not subject to the first-time homebuyer and income limits; therefore, it is not necessary for Cosigners to sign the Authority documents. Cosigners do not take title to the property;

however, Cosigners must sign the Promissory Note and are not allowed to sign the mortgage.

Section 5.1 Submitting Federal Income Tax Returns

To meet the first-time homebuyer requirement, the Applicant and any other adult Household members, including a fiancée, must submit to the Lender the last three calendars years of signed federal income

1875145v5 Page 18 tax returns, including IRS Form 1040A, IRS Form 1040EZ, Telefile tax record or IRS Form 1040 federal income tax returns with all schedules showing no deductions for interest or taxes for a Principal Residence (except for cases in Targeted Areas or which meet the Veterans’ exemption, in which case the Lender obtains only the previous calendar year’s federal income tax returns). The Authority requires a copy of all of the most recent calendar year’s IRS Form W-2s, IRS Form 1099s and/or IRS Form K-1s. No IRS Form W-2s, IRS Form 1099s and/or IRS Form K-1s are required for the previous two years.

Note: IRS Form 8453, U.S. Individual Income Tax Transmittal…