The pot of gold at the end of the rainbow — or rather, the special bonus that most homeowners look forward to after closing day — is the potential for a tax break on their mortgage. Many times, residential mortgage interest is fully tax-deductible. First-time homebuyers and homeowners who haven’t owned in the past three years may also qualify for a tax credit called MCC.
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The Mortgage Credit Certificate (MCC). How does it benefit homebuyers?
In its simplest terms, a Mortgage Credit Certificate is a certificate. MCC lets homeowners take a tax credit on a percentage of the interest paid on a mortgage for that tax year. David Bakke, personal finance expert at Money Crashers, explains. To take advantage of a Mortgage Credit Certificate, buyers must meet income, home purchase, and mortgage requirements. MCC programs may also vary by state.
For the buyers who fall within the sweet spot of eligibility, the Mortgage Credit Certificate allows 40 percent of the interest paid on a loan for the year (up to $2,000) to be used as a tax credit toward their income tax bill. Mary Galland, Senior Loan Officer at Cornerstone Home Lending, Inc., NMLS ID: 208605, 4372 N. Loop 1604 W., Suite 300, San Antonio, Texas, 78249, Branch NMLS ID: 281018, says, “The borrower can still take the excess as a tax deduction. Like you normally do with mortgage interest. The tax credit is good for the life of the loan. As long as you occupy the home as your primary residence.”
As Galland explains, MCC tax savings on a home loan will work a little something like this:
- Assume a family purchases a home for $125,000 at a 4.50 percent interest rate. Interest paid the first year is approximately $5,625.
- Mortgage amount: $125,000
- Interest rate: 4.50 percent
- Interest paid: $5,625
- MCC tax credit rate (40 percent of mortgage interest paid): 40 percent
- Tax credit amount: $2,250
- Maximum credit amount:* $2,000
*In this example, the homebuyer is entitled to a tax credit of the maximum $2,000. The homebuyer can also take a mortgage interest deduction of $3,625.
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How to make MCC work for you
MCC is geared toward first-time buyers. Including those who have not owned a home in the past three years. So, only certain homebuyers will benefit from this mortgage program. Megan Zavieh, attorney-at-law and licensed real estate broker in Georgia and California, reminds us that with MCC, buyers get a tax credit for a portion of their mortgage interest. (Much like homeowners get a deduction for mortgage interest paid.) “Since a credit is dollar-for-dollar money back in the buyer’s pocket, the lender can consider the anticipated credit as additional income to the buyer, allowing the buyer to qualify for a larger loan,” Zavieh says.
Buyers who would most benefit from MCC are those struggling to qualify for a loan. “First-time homebuyers trying to get into a home in expensive housing markets stretch to their max trying to buy a simple, small starter home. For these buyers, the MCC can help them get over the hump of qualifying for just enough to buy their first home,” Zavieh explains.
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Tax credit versus tax deduction is the distinction that makes MCC so beneficial to the low to moderate-income homebuyer. A tax deduction on mortgage interest paid may not help someone in a lower income bracket. A tax credit for a certain percentage of paid interest can pad a buyer’s budget, as Zavieh describes.
In a nutshell, these are the primary purposes of the MCC:
- Issued within a state-run initiative to support affordable homeownership.
- Helps reduce taxes for first-time buyers and can make it easier to qualify for a mortgage.
- Used to stimulate redevelopment in some special circumstances, i.e., in areas where natural disasters have occurred.
- Can work with a number of loan programs, including USDA, FHA, conventional, and VA loans.
- Eligible with most property types, excluding rentals, coop housing, investment homes, vacation homes, and motorhomes/campers.
As good as this sounds, there is a “but.”
MCC is not available in every state. MCC participation is driven by the county, Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, says. How much the credit is, what the income and purchase price limits are, and how much of your interest can be claimed as a credit all vary by county. As does the number of MCC certificates that can be issued. “Where I am — Silicon Valley — the homes are too expensive for the MCC to be relevant,” says Fleming.
If you live in a participating state, your Mortgage Credit Certificate will remain in effect for the life of your loan. That is, as long as you stay in your home as your principal residence. MCC won’t transfer to a new loan in a mortgage refinance. It also cannot transfer to another buyer or the purchase of another home. If your MCC amount happens to exceed your tax liability amount, the unused tax credit can be rolled over for the next three years or until it is used completely.
Better yet, MCC may provide tax benefits before tax season. After an annual tax credit has been calculated, you can contact your employer to revise your W-4. (Withholding less federal income tax from your paycheck.)
The whole purpose of the Mortgage Credit Certificate is to make buying a house easier and more affordable for first-time and eligible buyers. If you feel like you meet the requirements to take advantage, it’s time to have a chat with your lender. You must apply for MCC through a mortgage lender. Even with MCC, your specific loan terms are still determined by the loan program you and your lender select. Your lender can go over any MCC fees that may apply at closing (estimated at $500) and give you insight into how much the program can help when buying a house.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.