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July 22, 2021

The Mortgage Credit Certificate: Everything You Need to Know

If you’re buying your very first house, a mortgage credit certificate is something you should definitely know about!

Buying a new home can be difficult, especially for first-time homebuyers, which is why renting a house is often seen as the easier alternative. With the complexities of mortgages, their lenders and qualifying for loans with tax liabilities, one would want to minimize the costs of homeownership. 

Since purchasing a house in the United States can be expensive, a way to ease the burden is by paying less in federal taxes, so that you have more income to qualify for a mortgage.

Though not everyone is eligible for it, you could try to benefit from a lesser-known method: the mortgage credit certificate.

‍What is a Mortgage Credit Certificate?

A mortgage credit certificate, also known as MCC, is a program that helps first-time homebuyers get tax credits, that is, a reduction in the amount of federal income tax owed by them, on a portion of their mortgage interest. A tax credit is an amount of money that taxpayers are permitted to subtract, dollar for dollar, from the income taxes that they owe.

This certificate is a document issued by the state or local governments, designed to help individuals and families with low to moderate incomes purchase a home in the United States. 

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How Does a Mortgage Credit Certificate Work?

A mortgage credit certificate program provides up to $2,000 as dollar-for-dollar tax credits; that is, if you are eligible for a $1,000 tax credit through the MCC, then you’ll owe $1,000 less in your federal taxes in the given year.

MCC tax credits are calculated as follows: 

Eligible MCC Tax Credits = Mortgage Amount x Mortgage Interest Rate x MCC percentage 

The MCC percentage is set by the Housing Finance Agency (HFA), and can be anywhere around 10 to 50 percent.

Let's take an example to understand this better: 

Consider the gross income of a family as $50,000 with a tax rate of 15%, their mortgage amount as $200,000, and their mortgage interest rate as 2.75%.

If the family chooses not to apply for a MCC, their total federal income tax would be as follows:

Gross income: $50,000

Mortgage interest: $200,000 x 0.0275 = $ 5,500

Taxable income: $50,000 - $ 5,500 (Mortgage Interest) = $44,500

Federal income tax: $44,500 x 0.15 (Tax Rate)  = $6,675

Total due in one financial year: $6,675

Now, let’s take another family who, with all other factors remaining the same, chooses to apply for an MCC that offers 30% credit. 

Their total taxes would look like this:

Gross income: $50,000

Mortgage interest: $200,000 x 0.0275 = $ 5,500

Taxable income: $50,000 - $ 5,500 = $44,500

Federal income tax: $44,500 x 0.15 = $6,675

MCC: $1,650

Total due in one financial year: $5,025

As we can see, the second family can enjoy $1,650 in additional income for their mortgage. In addition to this, the reduced tax liability may even help them qualify for a loan during the initial approval process.

Note: If the total credit exceeds the IRS limit of $2,000, the homebuyer will have to report a $2,000 credit on their tax return. 

Who Qualifies for a Mortgage Credit Certificate?

There are certain requirements that every homebuyer must meet to be eligible for an MCC:

You must be a first-time homebuyer: Anyone who has not owned a home in three years is considered a first-time homebuyer.

You must meet the program's income and purchase price restrictions: These limits vary by state and household size. Every state has its requirements, which are designed to help families in the low- to middle-income category. The house's purchase price must also fall under a certain amount for the buyer to qualify for an MCC.

The income limit may range from $60,000 to $90,000 for one- to two-person households. Note that the income of a spouse whose name isn't on the mortgage may still count towards the MCC limit. 

You must intend to use the home as your primary residence: If you are interested in an MCC, but you surpass the income limit; or you are not a first-time buyer, then you can consider a home in a targeted area. These areas are designated by the state or Department of Housing and Urban Development and tend to have a more expanded income limit.

How to Apply For a Mortgage Credit Certificate

Every state doesn't need to have a mortgage certificate program; in fact, some states do not have one at all. To determine whether you qualify for a mortgage credit certificate, check your state housing finance authority’s website to learn specific requirements. If that is the case for you, checking out first-time homebuyer programs is a good place to start.

If your state has an MCC program and you are eligible for it, you will have to apply when you take out a mortgage loan. You must go through a participating lender that's been approved by the state Housing Finance Authority (HCA).

In many states, applying for a qualified mortgage credit certificate does not prohibit you from applying for other homebuyer programs, like closing costs or downpayment assistance.

You must claim the MCC tax credit every year on your federal tax return by completing IRS Form 8396, Mortgage Interest Credit and attaching it to your 2020 tax return.

You will need the following information from your certificate:

  1. Mortgage credit certificate number
  2. The date of issue
  3. Name of the issuer of the mortgage credit certificate

On Form 8396, you must enter the amount of interest you paid on the mortgage loan (referred to as the certified indebtedness amount). You can find this number on Form 1098, Mortgage Interest Statement, which you should have received from your lender. This is multiplied by your state's MCC rate, as shown in an example above, to calculate the credit amount you're eligible for. 

Next, you will account for and add any credit carrying over from the past three years. Please keep in mind that you should enter the final credit amount on Schedule 3. Schedule 3 lists additional credits you might be able to claim as well as some payments that will get applied to your tax bill. 

If you itemize your deductions, you will also need to adjust Schedule A to reduce the home mortgage interest deduction.

Mortgage Credit Certificate: Pros

MCC is a tool that makes housing considerably affordable: The program helps reduce taxes for first-time homebuyers, bringing them closer to qualifying for a mortgage. So, not only do you pay lower taxes, but you also have more money to put back into your home or savings.

You can receive significant tax credits with this program: First-time homebuyers qualify for a tax credit equal to 10%-50% of the mortgage interest. You are capped at a maximum of $2,000 for your savings but this credit is available for every year in which you are a qualifying homeowner, so this means you earn a lot of credit. 

You continue to receive tax credits as long as you live on the property: You may continue to receive a tax credit for as long as they live in the said home and retain the mortgage. That means you can save upto $10,000 on your taxes after spending five years in your home. If you stay there for ten years, then you can save upto $20,000. There is no long-term cap to this program.

Your credit score does not need to be perfect: Most states will let you qualify for a mortgage credit certificate with a credit score below 700. Some financial restrictions may apply, such as the number of liquid assets you have and some programs may not allow you to have more than $5,000 in your bank account.

Mortgage Credit Certificate: Cons

The home must remain your primary residence to continue qualifying: If you decide to move away from the said home and start living somewhere else, then you will no longer qualify for this program even if your income situation stays the same. That is why it may not be the best choice to pursue this option if your living situation might require you to move within the next ten years.

There is a maximum sales price to consider with a mortgage credit certificate: The maximum sales price for a home that qualifies under this program is $250,000. That means if you live in a high-income area with the average home price exceeding the set amount, you may not qualify for this program. There are also maximum income limits that you must consider, but these are based on the county's household income levels where you intend to purchase the home. 

There may not be a qualified lender in the area where you're purchasing a home: Many state programs specifically authorize brokers to issue a mortgage credit certificate. Because the emphasis on this program is based on the county where you intend to live, very few national providers in the United States can provide access to this program. If you plan to live in a rural area, then there might not be a qualifying lender in your area who can accept you into the local program.

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Akash Kalra
Akash Kalra is a writer, podcaster, and first-generation entrepreneur, as the founder of Izart Content Services: Home of Data Driven Storytellers.

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