Mortgage Credit Certificates: What Are They & How They Work

mortgage credit certificates

A mortgage credit certificate (MCC) is a home buyer assistance program that is designed to reduce the buyer’s federal tax liability. It is a type of document that allows the home buyer to claim a non-refundable tax credit for a portion of the mortgage interest paid.

The originating mortgage lender provides the mortgage credit certificate to qualified borrowers with limited income to help them purchase a home. It is important to note that a mortgage certificate program is not a loan product.

How Does a Mortgage Credit Certificate Work

Mortgage credit certificates are designed to help low to moderate-income home buyers qualify for a home loan by reducing their tax liabilities through a tax credit. Mortgage credit certificates allow eligible borrowers to receive a dollar-for-dollar tax credit for a portion of the mortgage interest they pay each year.

With a mortgage credit certificate, qualified borrowers can receive a tax credit that is equal to the combination of the home loan amount, the mortgage interest rate, and the MCC percentage, which is set by the administering Housing Finance Agency (HFA). MCC percentage varies depending on the amount of the original mortgage loan and this typically ranges between 10% and 50%. Borrowers can get a maximum tax credit of $2,000 each year.

The tax credit allows the borrower to pay less in income tax. The income tax savings from the mortgage credit certificate will then be considered as additional income by mortgage lenders and can, in essence, help subsidize or offset a portion of the monthly mortgage payment. This can help borrowers qualify for a loan during the initial approval process.

For example, a married couple with an annual household income of $50,000 is purchasing their first home. The mortgage interest that they will owe in the first year of their home loan is $8,000. Without an MCC, the couple would be able to deduct all of the $8,000 in mortgage interest that they paid during the first year. On the other hand, with a mortgage credit certificate for 20% of the interest on the mortgage, they will be able to deduct $6,400 of their mortgage interest and also receive a $1,600 dollar-for-dollar tax credit.

Tax Illustration Without a Mortgage Credit Certificate

 Annual income $50,000
 Mortgage interest to deduct $8,000
 Taxable income (15% tax rate) $42,000
 Federal income tax $6,300
 Total Income Tax Owed $6,300

Tax Illustration With a Mortgage Credit Certificate

 Annual income $50,000
 Mortgage interest to deduct (80% total) $6,400
 Taxable income (15% tax rate) $43,600
 Federal income tax $6,540
 Minus 20% MCC tax credit $1,600
 Total Income Tax Owed $4,940
 Net gain/savings from MCC (for the first year) $1,360

Mortgage Credit Certificate Qualifications

Mortgage credit certificates are tax incentives that are designed to help first-time home buyers to qualify for a home loan by reducing their federal tax liabilities. MCCs are specifically intended for low-to-moderate income borrowers.

Through a mortgage credit certificate, these borrowers will have an “additional income” in the form of the savings that they get from the tax credits.

According to the Internal Revenue Service (IRS), home buyers who were issued a qualified mortgage credit certificate (MCC) by their state or local government are typically eligible for tax credit. MCCs are generally issued only in connection with a new mortgage for the purchase of a primary residence.

Here are the standard eligibility requirements to qualify for MCCs:

  • Ideally for first-time home buyers. However, borrowers who are not first-time home buyers may still be eligible for a mortgage credit certificate if they purchase a property in an area that has been designated as economically distressed.
  • Home buyers should have low to moderate income, which can vary from state to state.
  • Home buyers should meet the purchase price requirements, which can vary depending on the state or local government issuing the MCC.
  • Home buyers should live in the home as their primary residence.

The mortgage credit certificate is not credited at the closing of the loan, but on the homeowner’s federal taxes upon tax filing. Borrowers are often allowed to combine mortgage credit certificates with another down payment program to maximize benefits.

How to Apply for a Mortgage Credit Certificate

Borrowers can apply for a mortgage credit certificate with the originating lender after the purchase contract has been signed and before the time of closing. There is typically a non-refundable service fee charged by the one administering the mortgage certificate program.

The state or local government will be the one who will grant approval for the MCC and not the lender. This approval is valid for up to 120 days and is usually transferable to another property if the current loan does not close.

The borrower can continue to use the mortgage credit certificate to get a tax credit every year for as long as they keep paying interest on the loan while occupying the house as their principal residence. In most cases, the mortgage credit certificate can usually be reissued if the borrower decides to refinance the loan.

Benefits & Drawbacks of Mortgage Credit Certificates

A mortgage credit certificate is meant to help home buyers with limited income to qualify for a home loan. Here are some benefits you can get with MCCs:

  • MCCs promote more affordable housing by providing additional savings from mortgage interest.
  • MCCs reduce taxes for first-time home buyers and help them qualify for a mortgage.
  • The homebuyer may continue to take advantage of the tax credit for as long as they live in the home and retain the mortgage.
  • Can typically be combined with other down payment and home-buying assistance programs to maximize benefits

A few drawbacks of MCCs include the following:

  • MCCs are not meant for all home buyers. Home buyers need to meet a certain income requirement to qualify.
  • Not all properties can qualify for MCCs. Home buyers should meet the purchase price requirements set by the state or local government.
  • For primary homes only, not for investment properties or vacation homes.
  • Borrowers may be subject to recapture tax

Recapture Tax

While majority of MCC borrowers are not subject to recapture tax, the Internal Revenue Service (IRS) may recapture a portion of the MCC benefit if the homeowner meets all of these conditions:

  1. The borrower sells the home within nine years of purchase
  2. The borrower has a significant increase in household income than when the property is bought
  3. The borrower has gained a profit from the sale of the home

Only borrowers who meet all three conditions will be subject to recapture tax. MCC borrowers are not subject to tax recapture if they sell, give away, or dispose of the property more than nine full years after closing. The maximum amount of recapture is 6.25% of the original principal balance of the loan or 50% of the gain on the sale of the home, whichever is less. This is payable upon the sale of the home.

Which Lenders Offer Mortgage Credit Certificates

Any lender should be able to help you to secure a mortgage credit certificate. As a result, they are not limited to any particular lender. Keep in mind that most consumers do not know about these certificates and as a result, it typically is not a topic of discussion during most loan applications. Therefore, your loan officer may not be that familiar with the process.

If you are interested in purchasing a home while taking advantage of a mortgage credit certificate, please complete this loan scenario form and one of our lenders will contact you to discuss your options.

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