putting an offer on a house

What is MCC? Hint: It’s a big help to first-time homebuyers

Bethany RamosFirst-Time Homebuyer, Home Buying, Industry Professionals, Loan Officers, Realtors, Taxes

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If you’re buying your first house, you could probably benefit from assistance. For the first-time buyers who qualify, this may come in the form of a special tax credit called MCC, or a Mortgage Credit Certificate. MCC may also be available to previous homeowners who haven’t owned a house in the past three years.

How does the Mortgage Credit Certificate benefit homebuyers?

The whole purpose of the MCC is to make buying a house easier and more affordable for first-time and eligible buyers.

In its simplest terms:

  • The Mortgage Credit Certificate is a certificate.
  • A new homeowner can use this certificate to receive a tax credit on a percentage of the interest paid on their mortgage for that tax year.
  • To utilize the MCC, a homebuyer must meet income, home purchase price, 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 typically allows around 40 percent (ranging from 10 to 50 percent) of the interest paid on a home loan for the year (up to $2,000) to be used as a tax credit toward their income tax bill.

If you’re a homebuyer who qualifies, this tax credit is good for the life of your loan, as long as you continue to occupy the home as your primary residence. (Click here to learn about other homeowner-friendly tax breaks.)

MCC tax savings on a home loan will work a little something like this:

  • Assume you purchase a home for $250,000 at a 3 percent interest rate. Interest paid the first year is approximately $7,500.
  • Mortgage amount: $250,000
  • Interest rate: 3 percent
  • Interest paid: $7,500
  • MCC tax credit rate: 40 percent of mortgage interest paid
  • Tax credit amount: $3,000
  • Maximum credit amount:* $2,000

*In this example, the homebuyer is entitled to the MCC tax credit maximum of $2,000. The homebuyer can also take a mortgage interest deduction of $7,500.

When you apply the $2,000 maximum to your tax bill using this form, the MCC will help to decrease the amount you owe. Depending on the value of your home and the percentage of your MCC tax rate, you have the potential for $2,000 in upfront savings.

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Here’s how to make the MCC work for you

The MCC is geared toward low- to mid-income first-time homebuyers, including those who haven’t owned a home in the past three years. A significant portion of MCC users are minorities and female heads of household. So, only certain buyers will benefit from this mortgage program.

With the MCC, a buyer gets a tax credit for a portion of their mortgage interest. (Much like homeowners get a deduction for mortgage interest paid.) Since this credit is dollar-for-dollar money back in a buyer’s pocket, a lender can consider the anticipated credit as additional income for the buyer, allowing the buyer to qualify for a larger loan.

Buyers who would benefit most from the MCC are those struggling to qualify. For example, first-time homebuyers trying to get into a house in an expensive market and stretching to buy a simple starter home. For these buyers, the MCC could make it possible to qualify for their first home — often, with room to spare.

Tax credit versus tax deduction is the distinction that makes the MCC so helpful to low- and moderate-income homebuyers. A tax deduction on mortgage interest paid may not help a prospective buyer in a lower income bracket. But a tax credit for a certain percentage of paid mortgage interest can help to pad a buyer’s budget.

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.

**Note that even with MCC, your specific loan terms are still determined by the loan program you and your loan officer select.

As good as this sounds, there is a “but.”

The MCC is not available in every state. MCC participation is driven by the county, influencing the amount of the credit, what the income/purchase price limits are, and how much interest can be claimed. The county also dictates the number of Mortgage Credit Certificates that can be issued. In an area like Silicon Valley, for example, the homes are too expensive for the MCC to be relevant.

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.

The MCC typically won’t transfer to a new loan in a mortgage refinance. It also cannot transfer to another buyer or the purchase of another home. Though the credit is nonrefundable, 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’s used completely.

Another condition to the MCC is what’s referred to as “recapture.” If you decide to sell your house within nine years of applying the tax credit, you may have to pay back some of the savings you received.

But the MCC may provide tax benefits right away — before tax season.

To cash in immediately, just contact your employer to revise your W-4, factoring in your MCC. The MCC can help to decrease the amount of federal income taxes you owe. When less is withheld from your paycheck each month, you’ll take home more money. Filing your MCC in advance in this way can yield an automatic income increase.

If you feel like you meet MCC requirements:

Take advantage. You must apply for the MCC through a mortgage lender: So, reach out to a local loan officer who can go over any MCC fees that may apply at closing (estimated at $500) and give you insight into how much this program could help when buying a house. Get in touch now.

For educational purposes only. Cornerstone Home Lending and its affiliates do not provide tax advice. Please consult your professional tax advisor for specific guidance.

Sources deemed reliable but not guaranteed.

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