Mortgage credit certificates (MCCs) aim to help first-time homebuyers with low to moderate incomes afford a home purchase by reducing their tax burden.
The MCC is issued in the form of a tax credit, which the homebuyer can apply to any federal taxes they might owe or roll over into the following tax year.
What is a mortgage credit certificate?
A mortgage credit certificate provides a dollar-for-dollar reduction in your tax bill — up to $2,000. The MCC itself is issued by the mortgage lender, while state and local Housing Finance Agencies administer the program.
This tax credit is based on the amount of mortgage interest you paid in the course of the year, as well as the state you live in. Generally, the housing finance agency in question sets an MCC percentage of between 10% and 50%.
The formula for figuring the MCC amount is fairly straightforward:
Multiply the home loan amount by the mortgage interest rate and the MCC percentage. The MCC percentage is established by the Housing Finance Agency.
Find out: Mortgage Refinance Tax Deductions Every Homeowner Should Know
Mortgage credit certificate pros and cons
MCCs can make buying a home more affordable, especially in conjunction with first-time homebuyer programs, and they come with certain advantages and risks.
Pros
- They make homeownership more accessible. Because they reduce the overall cost of mortgage interest, homeownership can be more accessible to those with low or moderate incomes. Your lender might deduct the amount of the credit from your debt-to-income (DTI) ratio when helping you qualify for a loan, making it easier to get approved.
- They can offer significant tax savings. Tax credits represent a dollar-for-dollar reduction in your tax liability. As a result, you can save up to $2,000 on your tax bill. On top of that, if your MCC brings your tax liability to $0, you can carry an unused portion forward to another year.
- They’re compatible with various loan types. In general, MCCs can be used on government-backed loans as well as conventional loans. Check with your state housing finance agency and local lenders to see how to use a mortgage credit certificate to your advantage.
Cons
- You’ll have to pay for it. The cost of the mortgage credit certificate varies by location. Depending on the lender, you might have to pay a processing fee and other costs. For example, Virginia charges up to $750 for the credit (although you might be able to have the fee waived), and lenders can charge up to $250. Other states might charge more or less, depending on their programs.
- You might have to pay back your tax savings. If you sell your home within nine years of using the MCC, you might have to repay some of your credit. This is known as “recapture.”
- You might not be able to use it if you refinance. Depending on the situation, you might end up losing the credit if you refinance your home. You can get around this if your existing MCC is reissued and meets certain conditions.
Learn More: 5 Types of Mortgage Loans: Which One Is for You?
How to get a mortgage credit certificate
The MCC is issued through your lender prior to closing on your home. You should request one early in the process since the lender must have the certificate approved before moving forward.
Once the certificate is approved, it’s valid for 90 days, so the closing should take place within that time frame.
Here are some of the general requirements for obtaining an MCC:
- First-time homebuyer status: You’ll need to meet your state’s requirements for being a first-time homebuyer. However, even if you’ve owned a home before, you might still qualify for this provision. For example, in Virginia, if it’s been at least three years since you’ve owned a home, you qualify as a first-time homebuyer.
- Household income: Limits to your income vary by state and county. In general, states base their programs on median income amounts. For example, in Florida, the income limit in De Soto County is $62,520 for a one-to-two-person household, but the limit is $78,700 in Miami-Dade County.
- Purchase price: Similarly, the limits on purchase price are set by state and county. In Florida, De Soto and Miami-Dade counties have different purchase price limits for non-targeted areas, $271,165 and $317,647, respectively.
- Location: Buying a home in certain designated areas could allow you to qualify for an MCC even if you aren’t a first-time buyer. Additionally, income and purchase limits might be different for those willing to buy in targeted areas.
Keep Reading: How to Save for a House
Claiming a mortgage credit certificate on your taxes
Borrowers claim the MCC tax credit using IRS Form 8396. To fill out this form, you need to be able to identify how much interest you paid on your mortgage during the year. You also need to know the MCC percentage shown on your mortgage credit certificate.
It’s important to note that this credit is non-refundable, so you won’t receive a refund if there’s a portion of the credit unused. However, if you don’t use the entire credit, you can carry any unused amount forward for up to three years.
Good to know: The mortgage credit certificate is different from the mortgage interest tax deduction. If you itemize your deductions, you can still claim a deduction on Schedule A for a portion of your mortgage interest, even if you use the mortgage credit certificate — though you’ll have to reduce the amount of your deduction.
