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What Is a Mortgage Credit Certificate?

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A mortgage credit certificate (MCC) allows qualified first-time homebuyers to claim a federal income tax credit — not just a deduction — worth up to $2,000 of mortgage interest they pay each year. It may also help low-income borrowers qualify for a higher mortgage loan amount.

However, not everyone is eligible for an MCC, and there are rules you’ll need to follow to be approved for an MCC tax credit.

What is an MCC tax credit?

An MCC tax credit allows you to buy a home and claim a dollar-for-dollar tax credit for up to $2,000 worth of mortgage interest paid per year. An added bonus: You can also write off the remaining mortgage interest as an itemized deduction.

A mortgage credit certificate tax credit is not the same as a mortgage interest deduction: A tax credit can be subtracted from your federal income tax bill. Lenders look at the tax credit as extra income, which means you can qualify for a higher loan amount, and ultimately a more expensive home.

However, the MCC programs set income and price restrictions to help low- and moderate-income families become homeowners.

How does a mortgage credit certificate work?

To understand how to calculate an MCC tax credit, you’ll need to know three numbers:

  1. Your total loan balance
  2. Your mortgage interest rate
  3. Your MCC tax percentage (usually between 10% and 50%)

Below is an example of how the MCC tax credit works, assuming you have a $250,000 loan amount at an interest rate of 3.25% and a mortgage credit certificate rate of 20%.

Loan balance $250,000
Multiply loan balance by the interest rate 3.25% ($250,000 x .0325%)
This equals your total mortgage interest paid $8,125
Multiply total interest paid by the MCC tax percentage 20%  ($8,125 x .20%)
This equals your first-year MCC tax credit $1,625

Once you know what your tax credit is, it’s helpful to see how it works when tax time comes around. The table below shows the difference in how much you would owe in federal taxes if you buy a home with and without the mortgage credit certificate, assuming you make $60,000 per year and are in the 15% tax bracket.

No MCC tax credit With an MCC tax credit
Income $60,000 $60,000
Mortgage interest deduction $8,125 $6,500*
Taxable income after deduction $51,875 $53,500
Federal taxes owed in 15% bracket $7,781.25 $8,025
MCC credit N/A $1,625
Total federal tax bill $7,781.25 $6,400
Total MCC tax savings $0 $1,381.25

*Mortgage interest deduction less the MCC tax credit

How an MCC tax credit helps you qualify for a larger mortgage

One major benefit of the MCC tax credit is lenders may add the tax savings to your income to help you qualify for a higher loan amount. Your debt-to-income (DTI) ratio is a measure lenders use to determine the loan amount you can afford. It’s calculated by dividing your new house payment and additional debt by your before-tax income, and lenders typically follow the Consumer Financial Protection Bureau’s recommendation of a 43% maximum DTI ratio.

The table below compares your borrowing power with and without the mortgage credit certificate using the income and tax credit figures in the previous example, and assuming you have $600 per month of other debt:

No MCC tax credit With MCC tax credit
Gross monthly income $5,000 $5,000
Plus MCC credit (divided by 12) $0 $115.10
Monthly qualifying income $5,000 $5,115.10
Maximum debt based on 43% DTI ratio $2,150 $2,199.49
Minus monthly debt ($600) ($600)
Maximum housing payment $1,550 $1,599.49
Maximum loan amount $242,368 $250,635

*Based on 1.2% property tax rate and $800-per-year homeowners insurance premium

What are the MCC certification requirements?

Not everyone can qualify for a mortgage credit certificate. State and local housing finance agencies (HFAs) set the guidelines for the MCC income limits as well as any price restrictions. Although MCC certification requirements may vary, to qualify you generally need to:

  • Be a first-time homebuyer. Most MCC programs define a first-time homebuyer as someone who hasn’t owned a home in the past three years.
  • Make no more than the income limits set by the program. The MCC administrator reviews three years’ worth of tax returns to confirm you don’t make more than the program allows.
  • Purchase a home within the price and area limits set by the program. You may be restricted buying in areas designated by the state or housing finance agency program.  
  • Be approved for a first mortgage loan. You’ll need to provide a loan application with details about your mortgage preapproval.
  • Plan to live in your home for the time required by the MCC program. According to the IRS, you typically need to live in your home for nine years for most MCC programs. If you don’t, you may have to repay some of the credit .
  • Pay the MCC program fee. The program fees vary by state and may include both an upfront fee and an ongoing annual fee.

How to apply for a mortgage credit certificate

  1. Fill out the MCC application for the program you’re interested in
  2. Provide a copy of the loan application from your mortgage lender
  3. Provide copies of three years’ worth of your federal tax return

THINGS YOU SHOULD KNOW

Check the fine print of your MCC application for information about the penalty for refinancing a loan or selling your home within a set “recapture” period (usually nine years, according to the IRS). The MCC may not be transferable to a new loan when you refinance, and it can’t be transferred to a new owner if you sell. This means you’d have to repay the tax credits you’ve taken if you sell or refinance the home before the recapture period ends. The recapture penalty rate increases the first five years, and gradually declines the remaining four. You can avoid the recapture tax if:

  • You live in the home for more than nine years
  • You don’t receive a capital gain when you sell
  • You pass away
  • Your annual household income is less than the MCC program limit at the time of resale

How to claim the MCC tax credit on your tax returns

There are a few IRS forms and other information you’ll need handy when it comes time to file your tax returns with a mortgage credit certificate.

  1. IRS form 1098.  At the end of the year, you’ll get a Form 1098 from your loan servicer. You’ll need the figure in Box 1 of the form to fill out the IRS MCC form.
  2. Mortgage credit certificate rate. Your MCC should show the tax credit rate (typically 20% to 40%).  This is not your interest rate, so be sure you look for the “certificate credit rate” on the mortgage credit certificate you received.
  3. IRS form 8396. The mortgage interest credit Form 8396 must be filed for the IRS to process your MCC tax credit. You’ll need to enter the information from the IRS form 1098 and your MCC in the correct boxes.
  4. Keep a copy of your file MCC forms for each year. Your MCC tax credit will drop gradually as you pay down your loan balance. You or your tax professional will need to know how much you claimed.

FAQs about the mortgage credit certificate program

Is the mortgage credit certificate worth it? The MCC program is worth it if you plan to stay in your home for at least nine years, and could benefit from the extra income to qualify for the home you want. If you know you’ll be moving within that time period, it’s probably not worth it.

What does an MCC certificate look like? Each program has its own format, but they should all contain information about:

  • How long you can receive the tax credit
  • What the tax credit rate is
  • The state or housing finance agency that issued the statement
  • A mortgage credit certificate number
  • Details about any recapture rules

How do I find out about mortgage certificate programs in my area? The National Council of State Housing Agencies (NCSHA) provides a directory of housing finance agencies in your area that you can check to find out about MCC programs in your area.

Do I qualify for a mortgage credit certificate? You should qualify if you meet the guidelines for the MCC program you apply for and the minimum mortgage requirements for the type of mortgage you’re approved for.

 

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