A mortgage credit certificate is a good way to purchase a home with limited income capacity, especially for a first-time buyer. Using this certificate allows the homebuyer to claim some of the mortgage interest paid on the home every year.
Are you buying your first home and need to save money on your mortgage? A mortgage credit certificate (MCC) might be the solution for you. Because MCCs are designed to help the purchasing process without much tax burden, lenders reserve MCCs for first-time homebuyers. Here’s how.
What is a mortgage credit certificate?
An MCC is a document that converts a portion of your mortgage interest into a non-refundable, dollar-for-dollar tax credit. The originating mortgage lender, such as the loan broker or the actual lender, issues this tax credit to the borrower directly. This provides first-time homebuyers with low or moderate incomes an opportunity to purchase a home.
When you take out a mortgage loan, the bank sets a mortgage interest rate that you pay every month. This payment is in addition to your home loan principal, which differs from a balloon mortgage. With an MCC, every year you can claim up to $2,000 on the mortgage interest paid by you. It also enables you to reduce the amount of federal taxes that you pay for the year.
In general, an MCC is a federal tax credit offered to the homebuyer by the IRS. This whole process is regulated by the state and local housing finance agencies.
Who is eligible for a mortgage credit certificate?
To be eligible for an MCC, you must meet the criteria issued by the IRS. State and local housing finance agencies (HFAs) prepare guidelines for the MCC programs, and many of them have the same set of basic requirements.
According to most MCC programs, you need to be a first-time homebuyer to qualify for an MCC. A first-time buyer refers to a person who did not own a home in the past three years. Because this program helps low and moderate-income earners, your income should not be higher than the median income in your state. The MCC administrator determines your income limits by evaluating your tax returns from the previous three years.
To receive an MCC, you must also have a pre-approved mortgage loan. The IRS will require the mortgage application details and its pre-approved status for your application.
Each MCC program has a fee, which differs from one state to another. Typically, homebuyers must pay an upfront charge and smaller monthly fees.
MCC Income and Purchase Price Limits
Since mortgage credit certificates are limited to low- to moderate-income families, there are income and area limits applied by the MCC program. You may have to look at homes within a certain budget or in specified areas selected by the state or HFA program. These limits change depending on the state and county that you live in and whether you live in a target area.
What is a target area?
Mortgage credit certificates also limit the purchase price of homes. However, this number also changes depending on whether you purchase a new or existing home. Since the state wants empty houses to be purchased, the purchase price limit is higher for existing homes than new ones.
MCCs can get a little complicated, so let’s look at an example to clarify.
Let’s say you live in Alameda County with another person. To qualify for an MCC, you and your partner combined can’t make more than $139,440. For three-person households, your combined income cannot exceed $160,356.
This number changes depending on whether you live in a target area. Let’s go back to Alameda County. The purchase price limit for a home in a non-target area is $953,262 for an existing home. This limit rises to $1,165,099 for existing houses in a non-target area, a significant difference.
As per most MCC programs and IRS, the homebuyer must live in the home they bought for a minimum of nine years. If the homebuyers do not meet that criterion, they will have to repay some of the credit.
How do mortgage credit certificates work?
Let’s say that you qualify for an MCC. The MCC gives you an MCC Percentage, a rate arranged by the HFA that ranges from 10% to 50%.
Let’s say you get a $175,000 mortgage loan amount at a 5% interest rate. For the first year, you expect to pay $8,750 as your annual interest fee. If your MCC percentage is 20%, you get a $1,750 tax credit. The IRS then takes the remaining annual mortgage interest of $7,000 from your gross income.
Mortgage credit certificates—Pros & Cons
MCC programs certainly make the process of buying your first home easier, but there are a few pros and cons you should be aware of.
Here is a list of the benefits and the drawbacks to consider.
- Reduced interest fees for first-time homebuyers with low or moderate incomes
- Reduced tax liability, which saves up to $2,000 per year
- Compatible with different types of loans (including conventional and government-backed loans like FHA and VA loans)
- Do not require a perfect credit score
- Offered in every state
- Often involves multiple fees, such as upfront and ongoing fees (varies according to the state)
- Homebuyer must live in the home for 9 years minimum
- May not benefit homebuyers looking to refinance (unless your MCC is reissued)
- Limits purchase price range and location of future home
MCCs are great for some new homebuyers. In addition to the pros listed above, MCCs allow taxpayers with a $0 tax liability to forward remaining MCC funds to another tax year. Fortunately, you can also qualify for an MCC with a credit score lesser than 700 in most states. (This changes depending on your liquid assets or any financial restrictions on your bank balance.) For homebuyers with credit scores as low as 620, there is the option of opting for a Subprime Mortgage.
Contact your state HFA and local lenders for more information.
How to claim the MCC tax credit
Borrowers can claim their MCC tax credit through a simple process. First, obtain the IRS form 1098 from your loan servicer at the end of the year. This form reports the mortgage interest you received during the year if that interest is $600 or more. You must add this figure to Box 1 of the form.
Second, you should know the MCC Percentage of your MCC. Usually, this is a percentage between 10% and 50%. This percentage is the certificate credit rate on the MCC you received.
Third, fill out form 8396 to proceed with your MCC tax credit. Make sure to enter the correct information from your 1098 form and your MCC in the appropriate boxes.
As you pay off your loan balance every month, your MCC tax credit will gradually decrease. It’s best to keep a copy or record of your MCC forms every year because your tax professional likely needs that information.
What does an MCC do?
An MCC program provides families the chance to become first-time homeowners. The program does this by allowing homebuyers to claim a portion of mortgage interest (up to $2,000) they previously paid. The homebuyer receives it as a non-refundable tax credit, which reduces the amount of federal taxes owed for the year.
Does everyone get an MCC?
Not everyone is eligible for an MCC. Only first-time, low- to moderate-income homebuyers may apply, though you also may apply if purchasing a home in a specific area.
Who regulates MCCs in California?
The California Finance Housing Agency is responsible for California’s MCC program, which you can learn more about here. We also recommend reviewing county-specific MCC qualifications as each county has different income and purchase price limits.
Is a mortgage credit certificate worth it?
Most times, an MCC is helpful for a borrower with a low or moderate-income level. Not only does the program provide these families with an opportunity for homeownership, but an MCC also provides substantial tax credits each year. You can carry forward the tax credit every year, provided you are a qualified homeowner.
An MCC also doesn’t require a high credit score to qualify. In most states, it’s less than 700 and the application process is hassle-free.
However, you may not qualify for an MCC as the IRS sets strict MCC qualification rules. This means a homebuyer living in a high-income area may not qualify, and there can be area constraints and purchase price limitations as well. Before applying for an MCC, talk with a mortgage expert to determine your best option.
How long is an MCC good for?
The MCC tax credit qualifies for the mortgage’s lifetime. So, as long as the borrower lives and labels that home as their primary residence, the MCC tax credit remains.
- Only qualified individuals may apply for a mortgage credit certificate, such as low or moderate-income families with no record of homeownership for the previous three years.
- An MCC converts part of the mortgage interest paid by the borrower into a non-refundable tax credit.
- To qualify for an MCC, the borrower must meet the requirements set by HFAs and the IRS.
- Speak with a mortgage expert before applying for an MCC as this may not be the best option for you.
View Article Sources
- What is a Participation Mortgage? — SuperMoney
- What is a Wraparound Mortgage? — SuperMoney
- Mortgage Credit Certificate Program Q&A — National Council of State Housing Agencies (NCHSA)
- About Form 8396, Mortgage Credit Interest — IRS
- Mortgage Credit Certificate Program — City of Brea