SERVICE ANNOUNCES NEW INCOME LIMIT GUIDELINES FOR MORTGAGE REVENUE BONDS AND MORTGAGE CREDIT CERTIFICATES

Rev. Rul. 86-124

This revenue ruling contains guidelines prescribing the manner in which the income limits applicable to mortgage revenue bonds and mortgage credit certificates are to be applied.

BACKGROUND

Section 1301 of the Tax Reform Act of 1986, Pub. L. 99-100 Stat. ___, added new income limits to the requirements that must be met in order for interest on a qualified mortgage bond to be excluded from gross income under section 103(a) of the Internal Revenue Code. In general, new section 143(f) of the Code provides that the income requirement is met if all owner-financing provided under the issue is provided for mortgagors whose family income is 115 percent or less of the applicable median family income. New section 143(f(2) provides that family income and area median gross income are to be determined by the Secretary after taking into account the regulations prescribed under section 8 of the United States Housing Act of 1937. The new income requirement, in general, applies to obligations issued after August 15, 1986.

These income requirements also apply to mortgage credit certificates issued under section 25 of the Code. A mortgage credit certificate provides a credit against federal income tax to the recipient of the credit for a portion of the interest paid on the recipient's mortgage loan on his or her principal residence.

With respect to any residence, section 143(f)(4) defines the term "applicable median family income" as the greater of--

(A) The area median gross income for the area in which the residence is located, or

(B) The area median gross income for the state in which the residence is located.

GUIDELINES

Until regulations are issued, determinations of family income and applicable median family income are to be made in the manner prescribed in this revenue ruling.

For purposes of section 143(f)(4), the "area median gross income" for an area or state must be determined in a manner consistent with the determination of "median gross income" for the area or state under section 8 of the United States Housing Act of 1937, as amended, with adjustments for areas of unusually high or low income. These adjustments must be made in the manner that these adjustments are made for purposes of section 8 of the United States Housing Act of 1937, as amended. Thus, in determining area median gross income, issuers must use the Revised Income Limits for Lower Income and Very Low Income under the Housing Act of 1937. The most recent limits were released by the Department of Housing and Urban Development in November 1985; these income limits may be relied upon until 30 days after the release of updated income limits. In using these limits, issuers must multiply the "very low income" limit for the area by 2.3 to apply the 115 percent limit of section 143(f)(1) and by 2.8 to apply the 140 percent limit of section 143(f)(3). Adjustments for family size are not required for purposes of determining area median gross income. (Issuers may, however, make adjustments for smaller and larger families if these adjustments are made with respect to all owner-financing provided under an issue.)

For purposes of applying the income requirements of section 143(f), the "family income" of a mortgagor (or mortgagors) is the mortgagor's annualized gross income. Annualized gross income is gross monthly income multiplied by 12. Gross monthly income is the sum of monthly gross pay; any additional income from overtime, part-time employment, bonuses, dividends, interest, royalties, pensions, Veterans Administration (VA) compensation, net rental income, etc.; and 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). Information with respect to gross monthly income may be obtained from available loan documents executed during the 4-month period ending on the date of the closing of the mortgage, provided that any gross monthly income not included on the loan documents must be included by the issuer in determining gross monthly income. Thus, for example, if the mortgagor does not include alimony on the loan documents, the issuer in determining gross monthly income must determine the amount of alimony and add that amount to the amount shown on the loan documents. The income to be taken into account in determining the gross monthly income is the income of the mortgagor (or mortgagors) and any other person who is expected both to live in the residence being financed and to be secondarily liable on the mortgage.

Issuers who wish to use information from available loan documents under the restrictions described in the preceding paragraph may, for example, find that information on (1) lines 23D and 23E on the Application for VA or FmHA Home Loan Guaranty or for HUD/FHA Insured Mortgage (VA Form 28-1802a, HUD 92900, Jan. 1982), or (2) the total line from the Gross Monthly Income section of FHLMC Residential Loan Application form (FHLMC 65 Rev. 8/78).

For purposes of section 143(a)(2)(B)(ii) (relating to good faith effort to comply), in determining whether 95 percent or more of the proceeds devoted to owner-financing was devoted to residences with respect to which the income requirement was met, the issuer may rely on an affidavit of the mortgagor stating that the family income of the mortgagor does not exceed the applicable income limit.