What is a Mortgage Credit Certificate? – Forbes Advisor

Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.

The decision to buy a home can be daunting, especially if it’s your first time and you’re competing in a booming real estate market. Even if you easily qualify for a mortgage, the money you need for a down payment, plus closing costs, poses significant hurdles for first-time homebuyers.

That’s why many federal and local government programs exist to increase homeownership opportunities for as many Americans as possible, especially those with low to moderate incomes. These programs, including the Mortgage Credit Certificate (MCC), help you take the first step onto the first rung of the homeownership ladder.

MCCs are intended to help first-time homebuyers qualify for a mortgage by reducing the amount of their mortgage payments. This is a scheme, overseen by the state housing finance agencies (HFAs), which grants the home buyer a significant tax credit linked to the interest they pay on the home loan.

How a Mortgage Credit Certificate Works

MCCs are issued to eligible borrowers by lenders who partner with state HFAs. Once you have an MCC, you are then eligible for a non-refundable federal tax credit equal to a specified percentage of the interest paid on your mortgage each year.

These tax credits can be claimed when you file your annual tax returns with the IRS. If you don’t wait until then, another option is to reduce your federal tax deductions on your W-4 through your employer. This way, you will receive the benefit sooner on a monthly basis.

How to get a mortgage credit certificate

Since the rules governing the MCC program vary from state to state, eligibility for an MCC depends on a few key factors. These include where you live, your income, the purchase price of the desired property and the size of your household. Other factors include:

  • Borrower’s income, loan amount and house price limits. Because the program is aimed at low-to-middle income buyers, there are caps on income, mortgage amount, and sale price for all MCC programs. However, these limits vary by state.
  • You must be a first-time home buyer. MCC programs are for first-time home buyers only. This means you haven’t had an interest in a principal residence for three years. However, this requirement is waived if you are an active duty military member, veteran, or are purchasing a home in qualified census tracts or difficult development areas, as designated by the Housing and Urban Affairs Department (HUD). ) or your state government.
  • Autonomy requirement. You must use the accommodation provided as your principal residence.
  • Mortgage and property advice. Many HFA programs require you to complete some form of pre-home purchase education course. These requirements vary by state and typically involve educating yourself about the mortgage application and home buying process.

Advantages of the mortgage credit certificate

The tax credit through an MCC is intended to make monthly mortgage payments more affordable as long as the property remains your primary residence by offsetting what you pay in interest.

The dollar-for-dollar tax credit eases the burden of loan repayment. In some situations, an MCC is required for you to qualify for a loan that you would not otherwise qualify for; by reducing your net monthly mortgage payment.

Unlike programs that help with mortgage down payments or closing costs, MCC programs do not place limits on the types of mortgage financing they can be paired with.

How an MCC is Calculated

Borrowers can get up to $2,000 tax credit each year. The exact amount of the tax credit is based on a formula that takes into account the mortgage loan, the interest rate and the MCC percentage. The MCC percentage depends on the original mortgage amount. Here are the ways the tax credit is applied depending on the state.

  • The tax credit is usually 20% to 40% of the total mortgage interest, but varies by state. If you itemize your deductions when you file your tax return, the remaining interest paid can be deducted as a standard mortgage interest deduction.
  • The MCC tax credit remains in place for the duration of the mortgage, as long as the house remains your principal residence.
  • MCC’s total tax credit for each year cannot exceed your federal income tax payable for that year after taking into account all other credits and deductions.
  • You can carry forward a credit that exceeds the current year’s tax liability for use in the next three years.

Important Factors When Considering an MCC

As with anything about buying a home, it’s important to explore the costs and risks of applying for an MCC. This will help you decide if the benefits are worth it.

  • Refinancing. MCCs are only eligible in combination with purchase loans, meaning you cannot apply for one as part of a refinance. However, if you already have an MCC and later decide to refinance, some states may allow you to request that your certificate be reissued against the new mortgage.
  • Costs. State real estate agencies typically charge the borrower a one-time fee for MCC, which will be included in your closing costs. In some programs, this fee is waived or reduced if the MCC is issued with an HFA first mortgage product. The amount of the fee varies by state. The lender issuing the certificate will also charge a fee, although these are usually capped at a specific amount.
  • Theirs. You may have to repay part of the tax credit to the IRS if you meet the following three conditions:
    • You sell the house within 9 years of buying it. (You will owe the IRS nothing if 9 years have passed before you sell the property.)
    • You are now earning a lot more income than when you originally bought the house.
    • You make a profit by selling the house.
    • The maximum amount the IRS can recover – payable when the home is sold – is 6.25% of the original principal loan balance, or 50% of your proceeds from the sale, whichever is lower.

Faster and easier mortgages

Check your rates today with Better Mortgage.