Mortgage Credit Certificates

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The Mortgage Credit Certificate (more commonly referred to as MCC) is a certificate issued by certain state or local governments that allows first time home buyers to claim a tax credit for some portion of their mortgage interest paid during the life of the loan. When purchasing and using an MCC if you sell the home within 9 years of your closing date you may have to recapture (repay) all or part of the benefit you received from the MCC program. For additional information on IRS’s policy for Recapturing (Paying Back) a Federal Mortgage Subsidy read IRS Publication 523.

The MCC program is designed to help first-time home buyers offset a portion of their mortgage interest on a new mortgage as a way to help home buyers qualify for a loan. Because it is a tax credit and not a tax deduction mortgage lenders use the estimated amount of the credit on a monthly basis as additional income to help the home buyer to qualify for the loan.

Some of these restrictions may be waived in certain circumstances. For example, following a natural disaster, state or local governments may raise or remove the income limits for affected municipalities temporarily to help spur redevelopment.

The MCC Credit can be used with Fannie Mae Conforming, FHA, USDA and VA home loans. These credits can help a home buyer qualify for a little “bigger” (more expensive) home. While all homeowners can claim an itemized tax deduction for mortgage interest, home buyers that secure an MCC can go a step further. An MCC reduces your tax liability, dollar-for-dollar, by a percentage of the mortgage interest you pay.

The amount of mortgage credit allowed varies depending on the state or local government that issues the certificates, but is capped at a maximum of $2000 per year if your State’s rate is over 20%, by the IRS. As an example, if a homebuyer were to receive an MCC that offers a 30 percent credit on a $200,000 loan for 30 years with a rate of 6%, the allowable tax credit would be figured as follows (all numbers rounded):

  1. Mortgage Interest Paid (1st Year): $11,933
  2. X MCC Credit: 30%
  3. = Total Credit: $3579

Because the total credit in this example exceeds the IRS limit of $2000, the home buyer would report a $2000 credit on their tax return or to put it simply a $167 each month you shouldn’t leave on the table if you qualify for the credit. The buyer may continue to receive a tax credit for as long as they live in the home and retain the mortgage, so ask about the Mortgage Credit Certificate early in the pre-qualification process. The program requires additional underwriting and starting early ensures you can use it without passing your sales contract closing date.

Generally speaking, MCC first time home buyers must meet certain minimum guidelines:

    1. Home buyers must not have owned a home in the previous three years.
    2. Home buyers must meet income and purchase price restrictions.
    3. Home buyers must intend to use the new home as a primary residence.
    4. Home buyers must provide the last three years of their Federal Income Tax Returns

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