First-time Home Buyer Tax Incentives: What is a Mortgage Credit Certificate?

Large modern home for first time buyers

There are many tips and tricks home buyers are merely unaware of because of the sheer complexity of homeownership, from the mortgage lending process to tax implications. So, why not make it easier on yourself by leveraging all available resources to lower the cost of homeownership?

An easy trick that may not be well-known is paying less in federal income tax, so you have more income to qualify for a mortgage. Not everyone can do that. But, if you’re able to receive a mortgage credit certificate (MCC) — it can be just that easy.

Learn what MCCs are, how they work, and who they benefit from the mortgage experts at American Financing.

Mortgage tax credits explained

So, what is an MCC? It’s a home buyer assistance program that allows borrowers to claim a dollar for dollar tax credit, reducing federal tax liability. The amount is dependent on interest paid but can be as high as $2,000. If it exceeds the IRS limit of $2,000, the home buyer must report it as $2,000 on their tax return.

The MCC program works by giving the borrower a tax credit equal to the product of the home loan amount, the mortgage interest rate, and the “MCC percentage,” which is a rate the administering Housing Finance Agency (HFA) sets between 10% and 50%.

And as an added benefit, the remaining mortgage interest paid may still be calculated as an itemized deduction.

Take a look at the example below for a breakdown on how MCC's work.

Example of tax credit

Mortgage lenders often consider the estimated tax credit amount as "additional income" to help buyers qualify for the mortgage. So, let's say the mortgage amount is $200,000, the mortgage interest rate is 4%, and the MCC percentage is 20%.

$200,000 (mortgage amount) x 4% (mortgage interest rate) x 20% (MCC percentage)

= $1,600 (estimated tax credit amount)

Because of the tax credit, the borrower will pay less in income tax. This $1,600 savings from the MCC can be considered extra income when qualifying for a loan.

Who qualifies for MCCs?

These certificates are tax incentives designed to help first-time home buyers qualify for a home loan by reducing federal tax liabilities. Though, the target audience is specifically low-to-moderate income borrowers.

According to the Internal Revenue Service (IRS), “you may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.” It's important to note an MCC is not credited at the closing of the loan, but on the homeowner’s federal taxes in the future.

Furthermore, the allowable credit can vary depending on the state or local government issuing the MCC and requires the home buyer to meet income and purchase price requirements, as well as live in the home as their primary residence. You can often combine mortgage credit certificates with another down payment program for additional benefits.

Check with your mortgage lender to determine the MCC or down payment programs that are available in your area. Programs, requirements, and fees can vary by state.

Benefits of an MCC

Plain and simple: they’re meant to promote more affordable housing. They reduce taxes for first-time home buyers and help bring 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 into savings!

Best of all, the home buyer may continue to receive a tax credit for as long as they live in the home and retain the mortgage.

MCC recapture tax

An MCC recapture tax is a federal IRS provision that requires homeowners who use an MCC to potentially repay the federal government a portion of the gain from the sale of their home. It's not very common unless you (the homeowner):

  • Sell your home within nine years of purchase
  • Have a significant increase in household income 
  • Have a profit from the sale of your home

The maximum amount of recapture is 6.25% of the original loan amount or 50% of the gain from the sale, whichever is less. If recapture is due, it is paid as part of the homeowner’s federal income tax liability for the year the home is sold.

Government home buyer assistance programs

In addition to MCCs, there are other home buying assistance programs sponsored by state or local government organizations that can help you. Check the Housing and Urban Development (HUD) website to find more useful programs near you and information.

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