Understanding the Mortgage Credit Certificate (MCC)

A Mortgage Credit Certificate (MCC) is a tax credit that directly reduces what you owe on your tax return, but you'll need to meet certain requirements to be eligible. Here's how MCCs work, how they help make buying a home more affordable, and where to apply for one.

What is a Mortgage Credit Certificate?

An MCC gives you a tax break on the interest you paid on your mortgage. It's a dollar-for-dollar tax credit you can claim when you file your taxes. These certificates are a way for lower-income and first-time homebuyers to reduce the taxes they owe each year, freeing up cash for other expenses. Because you get a portion of the money spent on interest back, it also effectively lowers your mortgage cost.

State housing finance agencies are in charge of designing and implementing their own MCCs, and the credit is typically worth 20% to 40% of the mortgage interest you paid over the year, according to the FDIC's affordable mortgage lending guide. You'll typically be able to claim the remainder of the interest on your tax return under the mortgage interest deduction (if you itemize your deductions).

Who qualifies for a Mortgage Credit Certificate?

MCCs provide a tax credit for first-time homebuyers, and there's usually an income cap.

Each MCC has its own eligibility criteria, so you'll need to check in with your local housing authority to find out the details for your individual situation. But in general, to qualify for an MCC, you'll need to:

• Be a first-time homebuyer
• Earn at or below the program's income limits
• Purchase a home that meets the program's purchase price limits
• Use the home as your primary residence

For example, in California, the mortgage credit certificate program offers a credit of 15% to 20% of the interest paid, depending on locality. Homebuyers may earn no more than 115% of the area median income and purchase a home priced no higher than 90% of the average area purchase price to qualify.

Benefits of obtaining a Mortgage Credit Certificate

A mortgage credit certificate offers many benefits, with the primary perk being a direct savings on your taxes each year. You can even elect to change your withholding on your W-4 filed with your employer to see the benefit on a monthly basis.

In addition, MCCs stay in effect for the duration of your mortgage, so it's not a one-and-done bonus. In fact, if the credit exceeds what you owe for the year, you can carry over the remainder to the following year, for up to three years.

Some lenders might even approve you for a larger loan since an MCC effectively increases your available cash for a monthly mortgage payment.

“The benefits are nice,” says Michael Chadwick, a certified financial planner and founder of Connecticut-based Fiscal Wisdom Wealth Management. “It's a dollar-for-dollar tax credit.”

“If you're eligible for it, I think it's a home run.”

How to apply for a Mortgage Credit Certificate

If an MCC sounds like the right step for you, here's how to apply:

1. Find local MCC programs: Your city, county, or state may offer a certificate. The National Council of State Housing Agencies offers a list of every state agency, where you can begin your search.
2. Check whether you qualify: Do you meet the program's requirements for occupancy, income, purchase price, and first-time homebuyer status? Don't forget to check whether the home you're buying is in a federally defined target area, which could change requirements. For instance, if you're shopping in a high-cost area, that could affect the purchase price or income limits. Some MCC programs are also open to other types of buyers, like veterans. You may also be required to complete a homebuyer education course to qualify, depending on the program.
3. Check whether the program is accepting applicants: Depending on how the program is funded, applications may not be open when you're ready to apply. See whether funds remain available in the program or when the program will reopen to applicants if the funds have already been allocated.
4. Complete the application: If you qualify and the program is accepting applications, you'll fill out an application and submit it to the housing agency. You may need to work with an approved lender to complete your application.

Once you've been approved, you can claim the credit on your tax return each year using IRS Form 8396.

Mortgage Credit Certificate and other homebuyer assistance programs

An MCC is one of several forms of homebuyer assistance available from state and local housing agencies. Other assistance can take the form of:

• Grants, which do not need to be repaid
• Second loans, which you take out alongside your primary mortgage
• Forgivable loans, which may be forgiven after a certain period of time if criteria are met
• Deferred loans, which do not need to be repaid until you sell the home

“For buyers who don't qualify for MCCs, I often recommend exploring other state or local down payment assistance programs, grants, or low-interest loans designed for first-time buyers,” says Shirley Mueller, who has 20 years of experience in home loans and is the founder of VA Loans Texas. She also notes that these other programs can either complement MCCs or serve as alternatives.

“In my experience, mortgage credit certificates are an excellent tool for helping low- to moderate-income homebuyers make homeownership more affordable,” she says.

Homebuyer assistance programs can help with:

• Purchase assistance: These are funds that go toward buying the home.
• Down payment and closing cost assistance: You can apply these funds toward your down payment and/or closing costs.
• Home modifications: These programs help homeowners to afford to make repairs, improvements, and modifications, including green-energy improvements.