Mortgage Credit Certificate – What is it?

The Mortgage Credit Certificate (MCC) is designed to help first-time homebuyers offset a portion of their mortgage interest on an new mortgage as a way to help homebuyers qualify for a loan.  It was recently made available in my market, and has changed the game.

Highlights:

The MCC is available to first time homebuyers who meet minimum guidelines:

  1.  Must not have live in a home that they owned in the last three years. Unless you are buying in an area designated as economically distressed.
  2. Must meet income and purchase price restrictions.
  3. The new home must be the buyers primary residence.
  4. The cost of the MCC is included in your closing costs.

The MCC allows a home buyer to claim a dollar for dollar tax credit for a portion of the mortgage interest paid each year. The maximum amount of tax credit available is $2,000 and each individuals amount depends on their specific situation. Functionally, the MCC reduces the borrowers federal income taxes and increases his/her net earnings. The net gain is the credit can help the borrower qualify for the initial loan.

Some people have called this the biggest secret in the world of homebuyer assistance programs.

How it works:

The MCC effectively reduces your tax bill for the full term of your mortgage, and in some instances it will increase your income, allowing you to qualify for more home. Perhaps the best way to describe it is to look at an example.

First, a few baseline definitions:

  • Determine the amount of mortgage interest you will pay over 12 months.
  • Apply the mortgage credit percentage that applies to your family income
  • Multiply the annual interest eduction by the MCC percentage
  • The result is  your annual mortgage interest deduction

Let’s assume you are qualified to purchase a $300,000 home. To determine the mortgage interest paid over the course of a year, multiply your purchase price by the interest rate on your loan.

 

Purchase Price

Loan Interest Rate (Sample) Total Annual Interest

$300,000

2.00%

$6,000

The home credit percentage rate (at least for Maryland) is 25%. Multiply the annual interest by the MCC rate.

Total Annual Interest

MCC Rate (MD)

MCC Value

$6,000

25%

$1,500

The chart below is from the Maryland MCC website. It very succinctly runs through the rest of our example on exactly how the MCC might benefit a new homeowner.

This is an immensely simplified example, but it puts the MCC into perspective. If you elect to use the MCC, you will have reduced mortgage interest on your tax returns, BUT you have an additional $1,500 as a tax credit at the end of the year. Effectively adding to your tax refund, or reducing your tax liability.

 

Tax consequences:

Here, I have to recuse myself. There are numerous tax benefits to the MCC. There are also numerous rules around recapture tax and what happens to the MCC if you were to sell. Here, I’d have to defer to a tax advisor. However, Texas based HillTop Securities has a wonderful FAQ sheet that gives you a good idea. Click HERE to go directly to their site for more information. (There is no affiliate relationship here, just a good site with detailed information.)

Why So Secretive?

This is a hugely beneficial credit for a new homeowner. You’re effectively reducing your taxes for the next 30 years. Unfortunately, lenders are marginally compensated for the MCC. It’s known to be lots of work with little to no compensation. At one point in history, lenders could not make any money from doing them. That’s changed in recent years, but even now, the lender compensation for an MCC simply covers the cost of the back office processing team. The loan officer directly is not compensated for selling them. Also, as with most government programs, it requires a lot of paperwork and sometime out right arguments between the loan officer and their internal processing/underwriting team. In my experience, loan officers that are not familiar with the MCC either will tell you the program either does not exist, was discontinued or that you do not qualify.

Looking for a home loan? Contact me today – for the MCC or other home loan product that might fit your needs.

Leave a Reply

Your email address will not be published. Required fields are marked *