First time home buyers look for every possible break when buying a home. These areas include lower interest rates, less closing costs, reduced monthly payment, and down payment assistance. Also, there is a little known tool which helps a first time home buyer or military Veteran more easily qualify for a mortgage as well as lower income taxes. It is called a mortgage credit certificate (MCC). So, buyers need to ask about it.
What is a Mortgage Credit Certificate?
An MCC or mortgage credit certificate offers qualifying homeowners a dollar for dollar tax credit on their federal tax returns. Qualifying home buyers receive an annual tax credit typically based on 30 – 50% of the owner’s yearly paid mortgage interest. Plus, the tax credit lasts as long as the homeowner occupies the home, still has the mortgage, and has an income tax liability. Further down in this article, we explain how the MCC tax credit works. Keep in mind, there is a $2,000 annual limit on the tax credit. Furthermore, it is important to remember that this is a bottom line tax credit rather than a tax deduction. Therefore, homeowners receive a larger monetary benefit from the tax credit vs a deduction. Photo by Dmitrij Paskevic on Unsplash
Who Can Get a Mortgage Credit Certificate?
Like other mortgage or home buying products, there are guidelines. In this case, there are limits on who may receive the tax credit.
Qualification Limits for MCC Tax Credit
- First time home buyer (not lived in a home they owned in previous 3 years)
- Military Veterans allowed
- Must occupy the home as a primary residence
- Meet household income limits
- Meet purchase price limits
The first 3 rules apply every time with no exceptions. Actually, first time buyers must provide the 3 most recent tax returns as a way to prove no home ownership within the previous three years. Although, the income and purchase price limits depend on the limit set by each state / local government unit or state housing agency. State Housing Agencies include NC Housing Finance Agency, SC Housing Authority, Virginia Housing Development Authority, and others. Each has their own set of programs and may include down payment assistance, grants, and/or tax credits.
Can I Get a Mortgage Credit Certificate Anytime?
No. One of the key reasons a buyer should learn and ask about the mortgage credit certificate up-front is that it must coincide with the purchase home loan. Once buyer closes, he/she loses the ability to apply for the credit.
How Does a Mortgage Credit Certificate Tax Credit Work?
Many state agencies offer MCC tax credits. These housing agencies then provide this and their other products to approved mortgage lenders and banks. Thus, not every lender has the ability to provide a mortgage credit certificate. Even though each state agency is a little different, agencies must follow the IRS MCC tax credit guidelines.
- Ask if lender provides MCC
- Provide answers to MCC related qualifications
- Prequalify for home loan
- Lender determines if MCC is possible
- Lender provides potential tax credit numbers to buyer
- Buyer provides required documentation
- Borrower file goes through mortgage underwriting process
- Lender sends file to state agency for MCC approval
- Buyer signs MCC documents at closing with other closing documents
- Buyer pays MCC fee at closing
How to Calculate an MCC Tax Credit
There are 4 factors which determine the initial mortgage credit certificate tax credit:
- Mortgage Interest Rate
- Loan Amount
- Tax Credit Percentage
- $2000 MCC tax limit
How Much Does an MCC Tax Credit Cost?
Wait, a fee? Yes, there is a one-time fee paid at closing for the ability to use the tax credit benefits. Again, this is an area where details depend on the state. For instance, $495 is the mortgage credit certificate NC Housing Finance Agency cost. Plus, lenders may charge up to an additional $300. Using $795 is a good rough figure to estimate other state costs until verified with a specific lender. Usually, the tax credit surpasses the cost during the first year. Since the MCC tax credit fee is considered a closing cost, it must by paid at closing. Also, an MCC fee may be paid by seller paid closing costs, lender credit, or even a real estate agent credit.
Filing a Mortgage Credit Certificate With the IRS
The annual MCC tax credit is utilized when the homeowner’s federal income tax return is filed. In true IRS fashion, there is an IRS form dedicated to filing for the tax credit. In order to calculate the mortgage interest credit, use IRS form 8396. Have questions?