A loan program that gets little attention, but could reap big rewards, is the Mortgage Credit Certificate, otherwise known as the MCC tax credit.
The idea of the program is quite simple: give homebuyers a big tax credit to help them pay for their mortgage.
Here’s how the mortgage credit certificate works
- You apply and qualify for the MCC tax credit with your lender
- At tax time, you get a dollar-for-dollar credit for a portion of the mortgage interest you paid, usually 20%.
- Your decreased tax liability allows you to submit a revised W-4 to your employer, reducing your monthly withholdings.
- You have potentially hundreds of dollars extra in your paycheck each month for your house payment.
|Interest paid in first year||$17,377|
|MCC credit amount||20%|
|Tax credit amount||$3,475|
|Extra money in homebuyer’s paycheck||$289 per month|
In this case, the homebuyer would have an extra $289 per month to help with the mortgage payment. That could mean you could afford to buy a home that’s $30,000 more expensive.
How to qualify for a mortgage credit certificate
The MCC tax credit program is a federal program, but it’s administered by state agencies. States such as Washington, North Carolina, Texas, and California allow the program. Check with your state housing agency to see specific standards for your area.
Here are fairly common mortgage credit certificate standards nationwide:
- The MCC tax credit is only issued on a new mortgage for a home you’re buying.
- The home must be your primary residence.
- You must be a first time homebuyer (you haven’t owned a home in 3 years)
- You can have an MCC tax credit in combination with a convention, FHA, VA, or USDA mortgage.
- There is a fee for the MCC, usually around $650.
- There are income and purchase price limits.
- Homebuyer education may be required.
How do I know if a mortgage credit certificate is right for me?
An MCC tax credit can really do a lot to help you pay for your home. However, it’s not for everyone. You might be a good candidate if you:
- Have medium to high income
- Are opening a fairly large loan
- Pay at least as much in federal taxes as your estimated MCC credit.
- Are in a higher tax bracket.
An MCC credit may NOT be right for you if:
- You have a low income, and therefore pay very little federal income tax.
- Have a small loan amount and therefore won’t pay very much in interest each year.
- Have a lot of other deductions like many children or substantial charitable giving.
- Plan to refinance soon (there is another MCC fee each time you refi).
- Plan to move out or sell your home in the next 9 years (see next section).
Mortgage Credit Certificate Pitfalls
On the surface, an MCC credit sounds like a win-win. But here are some things you need to watch out for.
Tax credit payback. If you sell your home, or convert it to a rental or second home, within 9 years, you may have to pay back some or all of the MCC credit. That could be one big tax bill.
MCC credit is bigger than your tax owed. You can’t claim a credit if it’s bigger than your overall tax bill. So if you owe $2,000 in income taxes, but your MCC credit is $3,000 for the year, you will lose $1,000 of your credit.
MCC fee. The fee, usually around $650, adds to your loan closing costs. If your savings with the program are small, it could take you a year or two to break even on the fee.
Final words on the MCC tax credit
While the MCC is not for everyone, it can help you to qualify for more house. Some states and lenders even let you count your tax savings as extra income.
This benefit can be extremely helpful in areas with high housing costs. First time homebuyers need all the help they can get in these high-cost geographical areas.
As with any tax decision, consult a licensed professional prior to making any tax-related decisions. With the right counsel, you might find that the MCC tax credit is the perfect tool to make your first home the perfect home.