A guide to saving money with mortgage credit certificates

Mortgage credit certificates (MCCs) are a little-known but valuable tool that can help low income and first-time homebuyers save money on their mortgage. If you’re looking for a way to save on your monthly mortgage payments while boosting your home’s equity, MCCs may be the solution you're looking for. 

The portion of the mortgage interest received as a tax credit allows borrowers to reduce their overall tax liability and housing costs. In order to use a MCC, borrowers must complete an application through their state or local governments. This application will then be reviewed to determine if you meet all of the eligibility requirements in order to receive your certificate. Once certified, you will receive an IRS Form 8396 which must be included with your annual federal tax return in order to receive your credit each year.

What are mortgage credit certificates?

A mortgage credit certificate allows qualified homebuyers to receive a non-refundable tax credit when they pay their mortgage interest. This is not a loan feature or product, but a document provided by the originating mortgage lender or loan broker that enables you to convert a portion of the interest you paid during the year into an eligible tax credit. 

Mortgage credit certificates can benefit first-time homebuyers and people with low incomes to purchase homes that would otherwise be out of reach due to high costs associated with purchasing property. That makes them similar to other homebuying programs offered by state and local governments that can help you get reduced interest rates, closing cost help, and down payment assistance.

States may also offer MCCs if you’re looking to buy a home in certain areas, as a way to increase homeownership there. By providing more affordable housing opportunities through these types of credits, local governments are better able to attract new residents while also increasing property values in their communities and improving overall quality of life.

Related: is there a first-time homebuyer tax credit?

How do mortgage credit certificates work?

Mortgage credit certificates work by providing eligible homebuyers with a tax credit for a portion of the mortgage interest they pay annually. Credit amounts vary, but typically range from 10% to 50% of the interest paid each year and are typically capped to a dollar amount as well. Generally, the maximum amount you can receive is determined by your annual mortgage interest payments, income level and family size. 

Let’s say you take out a $400,000 mortgage to buy a home and have an interest rate of 5.5%.

• The total mortgage interest you paid for the year is $20,000.
• With an MCC of 20%, you would get a tax credit for $4,000. (20% x $20,000 = $4,000)
• However, there is also a yearly maximum credit limit of $2,000, so you would only be able to claim that much. 
• If your tax liability for the year ends up being $2,300 you will end up only owing $300 in taxes. ($2,300 tax liability - $2,000 tax credit)

The certificate applies for the lifetime of the mortgage.

Who can get a mortgage credit certificate? 

In order to qualify for the certificate, homebuyers must be first-time buyers and meet certain income requirements.

• First-time homebuyers: This is typically defined as not having owned a home in three years.
• Repeat home-buyers: You must purchase a home in a targeted area specified by your state. 

The home you’re purchasing must also meet certain criteria, which can vary by state, but generally you can expect the following rules:

• Occupancy: The property must be used as a primary residence.
• Location: Your new home must be located within the state.
• Purchase price: Your home must fall within the purchase limits, which can vary by county.
• Lot size: Some states may restrict mortgage credit certificates to homes within a certain acreage.
• Age of home: New constructions and existing homes tend to both be eligible. 
• Type of property: Single-family homes, duplexes, townhomes, and condos typically qualify for use of an MCC, as do manufactured homes with certain restrictions.

How to get a mortgage credit certificate

During the homebuying process, you can apply to get a mortgage credit certificate when you’re in the stage of getting a mortgage or getting pre-approved. Here’s what to do. 

1. Find an approved lender in your area

Not all states offer an MCC program, so in order to get one, you should first contact your local state housing agency or check their website to find out if they do. If you already have a lender in mind, you can also ask them. You may have to pay one-time fees to process your application, which may cost from $250 to $750 or more, depending on the policy in your state. 

2. Meet eligibility requirements 

In order to get a mortgage credit certificate, you’ll need to meet certain income thresholds and not have purchased a primary residence in three years. In 2020, 68% of mortgage credit holders earned the medium income or below, according to the National Council of State Housing Agencies.

Furthermore, it's important to understand that you may need to pay back any unused portion of your MCC if refinancing or selling before 15 years of ownership. It’s therefore crucial for potential borrowers to read up on all necessary documents thoroughly before applying for an MCC.

3. Fill out the paperwork 

You will need to provide evidence of income and home purchase information, as well as other documentation such as bank statements, tax returns, and proof of residency. You’ll need these documents when you’re applying for a mortgage in general, so it’s good to get them ready when you’re preparing to buy a home.

Once approved, the state or government-approved lender will issue you an MCC that can be used when filing your taxes. It is typically mailed to you after closing, and you may not get one every year so make sure to store it in a safe place.

Benefits of mortgage credit certificates

The MCC is a dollar-for-dollar federal tax reduction against the amount of federal taxes that you owe. Here are a few reasons why it might be worth applying for one.

Save money on taxes

The most significant benefit of using an MCC is that it can save you money on your taxes. The tax credit is based on a percentage of the interest you pay on your mortgage, and the credit amount is subtracted directly from your tax liability. This means that you can lower your tax bill each year and keep more money in your pocket.

Increase your homebuying power

Another benefit of using an MCC is that it can increase your home buying power. Since the tax credit lowers your tax liability, you'll have more money available to put toward your mortgage payment each month. This can help you qualify for a larger mortgage and buy a more expensive home.

Keep more money in your pocket

When you use an MCC, you'll have more money in your pocket each month. Since the tax credit lowers your tax liability, you'll have more disposable income to use as you see fit. You can use this extra money to pay down other debts, save for retirement, or simply enjoy a higher standard of living.

Increase your home equity 

Using an MCC can also help you build home equity faster. Since you'll have more money available to put toward your mortgage payment each month, you'll be able to pay down your principal faster. This means that you'll own more of your home sooner and be able to build wealth more quickly.

Potential drawbacks

• Homeowners must pay an application fee.
• Tax savings may need to be repaid if the home is sold within nine years of using a MCC.
• Refinancing might mean losing out on the credit unless the existing MCC is reissued.

How to claim a mortgage credit certificate on your taxes

Tax season is never fun, but it can be a lot more tolerable when you stand to save some money on taxes thanks to a helpful tax credit. To claim a mortgage credit certificate on your taxes, you'll need to have the official documentation of the MCC, which you received when you bought your home and took out the mortgage.

You’ll use the certificate to fill out IRS Form 8396 and submit it with your other tax documents. When filling out the form, you'll need to identify: 

• The mortgage certificate number and date of issue
• The credit rate (a percentage) shown on your certificate 
• The total interest you paid on your mortgage during that tax year 

MCCs are non-refundable credits, so if there's any portion of it that goes unused, it cannot be refunded or claimed as a refundable credit at a later date. For example, if you calculate your mortgage credit to be worth $1,500, but do not owe any taxes, you won’t get a refund check from the IRS of $1,500. However, any unused credits can be carried forward for up to three years. 

Claiming a mortgage credit certificate also does not invalidate your ability to itemize deductions for mortgage interest. You can still claim a deduction on Schedule A for a portion of your mortgage interest even if you are using the MCC. However, you will need to reduce the amount of your deduction accordingly.

Is an MCC worth it? Who should use an MCC

Homeownership is a major expense, and it’s understandable that many new homeowners want to save a little money after buying their first home. While mortgage credits are capped annually, they can still help you cut down on the costs of homeownership , especially when combined with other tax deductions and credits. Applying for one an MCC is a process, but worthwhile since you can continue to claim the credit for the lifetime of your loan. 

Mortgage credit certificates can make a lot of sense if you are a first-time homebuyer and can be an attractive option for those who may not have enough money saved for a large down payment. Furthermore, an MCC could benefit homebuyers who qualify for the credit by increasing their buying power and making them eligible for more loan options in addition to traditional financing. Ultimately, an MCC can be especially advantageous to those who may otherwise struggle to afford their monthly payments while they work towards building equity in their home.

On the other hand, a MCC does not make sense if it would rule out eligibility for other home programs, including certain loans offered by the state housing authority. Mortgage credit certificates can typically be coupled with other loan programs offered by your state, but to make sure you should check with your local housing finance authority’s website regarding their own rules and regulations.By researching MCCs, you can feel confident and rewarded knowing of the cost-savings you’ll get for years to come in your new home. 

FAQs 

Here are some more details about using mortgage credit certificates and how they work. 

What does a mortgage credit certificate do?

A mortgage credit certificate (MCC) is a tax credit that can help lower-income homebuyers afford their mortgage payments. The MCC allows the borrower to claim a portion of their mortgage interest as a credit on their federal income taxes, reducing the amount of tax owed.

Where can you get a mortgage credit certificate?

MCCs are issued by state or local housing finance agencies, or by certain non-profit organizations that work with these agencies. If your state has an MCC program, you can apply for one with an approved lender when you take out your loan. Ask your loan officer for more details. 

How do you calculate your mortgage credit certificate?

The amount of the MCC credit depends on the mortgage interest paid during the year, the borrower's income, and the state's MCC program rules. Multiply your loan amount by your interest rate and your mortgage credit rate to arrive at your maximum tax credit. Mortgage credit rates may be 10% to 50% of the mortgage interest paid, up to a maximum amount set by the state. 

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