The sheer complexity of buying your first home from the mortgage lending process to tax ramifications can lead to potential stress. But there is a silver lining. Not many people are aware that if their income falls below certain guidelines they may be eligible for a mortgage credit certificate (MCC). This will help many first-time homebuyers to pay less in Federal income tax and thus lower their cost of homeownership.
Here is all the basic information you need to know about mortgage credit certificates.
Mortgage Credit Certificate Explained
A mortgage credit certificate (MCC) is a document that is given by the IRS to qualifying homeowners to claim a tax deduction of up to $2,000 for part of their mortgage interest paid each year. Lenders view the tax credit as more income, allowing borrowers to qualify for a larger loan amount and, in turn, a more expensive home. The MCC is issued by either the loan brokers or the mortgage lenders themselves and the program is administered by state and local Housing Finance Agencies.
To understand the exact amount of tax credit that you can receive you will have to understand the three numbers that are taken into account:
- The total mortgage amount
- The mortgage interest rate
- The mortgage credit certificate percentage. (Which ranges from 10% to 50%)
For example, if you have a $250,000 mortgage at a 3.25% interest rate and you receive a 20% mortgage credit certificate rate, then your tax credit will be $1,625
250,000x 0.325x.20= $1,625
The $1,625 would be applied to your overall tax amount, lowering your payment.
Who Qualifies For A MCC?
The requirements to qualify for mortgage credit certificates vary widely from state to state. However, the IRS has some general requirements that a borrower must meet to qualify for an MCC. Some of these are:
- You must be a first-time homebuyer: A first-time homebuyer is defined by most MCC programs as someone who has not owned a house for the last three years.
- MCCs can only be used for primary residences: Such as condos, detached houses, and town homes.
- Income restrictions: The program is only available to low-to-moderate income homebuyers and house hold earnings should not be more than the state’s median income. According to the National Council of State Housing Agencies in 2019 around 70% of borrowers qualified the median or less than the median income limits.
- A maximum mortgage amount and area limits: You cannot purchase a home worth more than the price and region restrictions set by the state and local Housing Financing Agencies.
- Obtain a first mortgage loan approval: You will have to fill out a loan application that includes information regarding your mortgage pre-approval.
The Benefits and Downsides of a Mortgage Credit Certificate
A mortgage credit certificate comes with certain advantages and downsides.
- It promotes more affordable housing as it reduces the overall mortgage interest costs. As a result, first-time homebuyers not only pay lower taxes but also have more money to invest in the property or save!
- Homeownership will be more attainable to borrowers with low-to-middle income.
- Some states such as Maryland provide special exceptions to homeowners to take up to 25% off their mortgage interest (up to $2000 per annum). This helps homeowners save money because the cash is used to pay the loan’s immediate principal rather than interest. Many other states also provide similar incentives to their residents.
- Homeowners will continue to receive a tax credit every year as long as they live in the home and pay off the mortgage.
- They work with a variety of different loan types. A mortgage credit certificate can be utilized on both government-backed and non-government-backed loans.
For further benefits, you can typically combine a mortgage credit certificate with another down payment program. Consult your mortgage lender to learn about the MCC or down payment assistance programs available in your area.
- You have to pay a processing fee and other costs: The cost for an MCC will vary by state and may include a one-time fee as well as a yearly fee. Generally, the cost is around $650 in most states. However, the lender might also charge a processing fee.
- You may have to pay a “recapture fee”: Typically, you cannot sell your home within the first nine years of purchase. If you do then you may have to refund a portion of the savings of the MCC from the sale of your home.
- You might lose your credit if you refinance: Depending on your circumstances you may not be able to avail of the tax deduction if you refinance your home. You may be able to avoid this if your current mortgage credit certificate is renewed or meets certain requirements.
Despite the downsides, a mortgage credit certificate can be an excellent opportunity for many homebuyers to save money on their mortgage.
It is common for the IRS and state governments to suspend income limits, housing valuations, and other requirements so that many other homebuyers too can qualify for mortgage credit certificates. This is especially frequent during economic downturns or when the housing market is sluggish to boost growth.
Therefore, you must check the mortgage credit certificate requirements when looking to purchase your home. This is a wise decision as it will allow your money to work harder for you.