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What Is the Mortgage Credit Certificate?

As a first-time homebuyer, you most likely already know some of the biggest federal tax benefits of owning a home, like possibly being able to deduct both the cost of your mortgage interest and property tax payments. But a mortgage credit certificate (MCC) can help too.

The certificates are issued through a special program that generally gets less attention, but which is aimed at helping first-time buyers receive a dollar-for-dollar tax credit — not just a deduction — for some of the annual mortgage interest paid each year. Unlike a tax deduction, a tax credit can be directly subtracted from a federal income tax bill.

The MCC program is administered by housing finance agencies (HFAs) in 30 states, and gives qualified buyers a chance to claim a federal tax credit up to $2,000 at the same time they take out a mortgage. The certificates can be used together with most first loans, including those from the FHA, VA and USDA. The tax credit puts money directly into the pockets of homebuyers, but also can help them in another important way: By boosting monthly qualifying income, an MCC can help some buyers qualify for a larger loan than what might ordinarily be available to them.

Interest in MCCs appears to be growing steadily.

“The number of mortgage credit certificates has increased about six-fold since 2012,” said Greg Zagorski, a senior legislative and policy associate at the National Council of State Housing Agencies.

According to Zagorski, some 5,000 MCCs were issued in 2012, but over 30,000 homebuyers received an MCC five years later, in 2017.

How does a mortgage credit certificate work?

The MCC program was created by the federal Deficit Reduction Act of 1984 and caters to low- and middle-income homebuyers. The credit is calculated by multiplying three numbers: the total amount of a homeowner’s mortgage, the mortgage interest rate and a special MCC tax credit percentage. The percentage varies by state but is generally between 20% and 40%.

Here’s how the tax might play out for a homebuyer carrying a $200,000 loan and paying 4.25% interest. In a state where the MCC percentage is 20%, that homeowner would be entitled to an annual federal tax credit of $1,700.

To claim the tax credit, homebuyers typically have two options: They can either claim the full credit when they file a federal tax return or receive the credit on a monthly basis by filing a new W-4 form with their employer that reflects the MCC credit.

If you plan to use a mortgage credit certificate –– and also itemize taxes — keep in mind that using an MCC will change the amount of mortgage interest you can list as a deduction. You’ll still be able to list mortgage interest as an itemized deduction, but the amount you enter will be what’s left after you subtract your MCC tax credit percentage. So, if your homeowner’s MCC tax credit percentage is 20%, you’ll only be able to list the remaining 80% of your mortgage interest as a deduction.

Who can claim a mortgage credit certificate?

To be eligible to receive a mortgage credit certificate, you must meet the following general requirements:

  • Be a first-time homebuyer
  • Complete homeownership counseling
  • Home must be the owner’s primary residence
  • Home does not exceed state purchase price limit
  • Income does not exceed state income restriction limit
  • First-time buyer requirement may be waived for active military and veterans

Be aware that a portion of your mortgage credit may eventually be subject to what the IRS calls a “recapture tax.” This can occur if you meet all three of the following conditions: your income increases significantly after the purchase of the home, the home is sold within nine years of being purchased and you have a gain from the sale of the house.

Some states also charge a non-refundable fee for applying for a mortgage credit certificate, and the amount of this fee can vary. For example, the state of Mississippi charges program applicants $300, while Virginia charges $750.  

Steps to getting a mortgage credit certificate

If you are a first-time homebuyer and believe you might qualify for an MCC, check first with your state housing finance agency to see what the requirements are for your area. You’ll find HFAs listed by state at the website of the National Council of State Housing Agencies. By contacting an HFA, you’ll also be able to see which lenders are allowed to issue you the certificate.

Each state has its own specific eligibility requirements, but in general homebuyers can expect limits on income and purchase prices, and possibly also property size or type. Your annual income usually can’t be more than your statewide or area median income, whichever is larger.

Once you select a lender for your mortgage, you can begin applying for both your loan and an MCC. Your lender will confirm whether you are eligible for the program and, if you are, will process both applications at the same time.

As part of applying for an MCC, you’ll need to include federal tax returns for the last three years, copies of your loan application and a copy of the loan estimate that lenders typically provide when you first apply for a mortgage. Your application will then be reviewed by an HFA program administrator, and if approved, you will have 120 days to close the loan.

At this point, a lender and your local HFA may charge you an additional fee for your MCC. The fee charged by the lender will vary based on the state, and is capped at a certain amount. In some states, like Louisiana, where the lender fee is $500, the fee is left to the discretion of the lender. The HFA fee also varies by state. Both fees, if required, are typically paid at the time you close.

After you close on your mortgage loan, your local HFA will review your MCC again, and if all goes well, you’ll received a signed MCC in the mail. Once tax season comes around, you’ll be able to claim the MCC tax credit on your income tax form.

The bottom line

Like many homebuyer assistance programs, the MCC program has made homeownership a possibility for those who may not believe it is an option. By offering a tax credit and making monthly mortgage payments more affordable, this particular program has perks that might appeal to many first-time homebuyers.

 

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