How does an MCC affect what size mortgage you qualify for?
From a high-level standpoint, a mortgage credit certificate (MCC) increases the mortgage amount you qualify for by lowering your federal tax bill. An MCC enables you to subtract 15% to 50% of your mortgage interest expense from the federal taxes you owe.
For example, if you pay $10,000 in annual interest expense and you have a 20% MCC, you receive a $2,000 credit that is subtracted from your federal tax bill ($10,000 (interest) * 20% (MCC) = $2,000 (tax credit)). So if you owe $8,000 in federal taxes before the MCC, you only pay $6,000 in taxes after subtracting the MCC. In this example, the MCC saves you approximately $167 per month in federal tax payments.
It is important to highlight that a tax credit, such as the one provided by an MCC, is better than an income tax deduction because a credit is subtracted from your taxes owed on a dollar for dollar basis. An income tax deduction reduces your taxable income, which means your actual tax benefit is only a fraction of the deduction.
Review How a Mortgage Credit Certificate Works
Please note that borrowers with an MCC can deduct the amount of interest cost that is not covered by the MCC from their gross income, which provides an additional tax benefit, but the credit is what really boosts your ability to qualify for a mortgage.
How does an MCC improve your ability to qualify for a mortgage?
In short, the MCC is added to your monthly gross income to determine what size mortgage you can afford. The higher your monthly income, the more you can afford to spend on your mortgage payment and other housing expenses such as property tax, homeowners insurance, mortgage insurance and other applicable costs. The more you can spend on your monthly mortgage payment and these other housing costs, the higher the mortgage amount you qualify for.
This is because when you apply for a mortgage, lenders apply a debt-to-income ratio that determines how much of your monthly gross income you can spend on your mortgage payment, other housing costs and monthly debt expenses for credit cards as well as car, student and personal loans. Debt-to-income ratios vary by lender and loan program but typically range from 43% to 50%, which means you can spend 43% to 50% of your monthly income on all of your debt expenses including your mortgage payment.
With an MCC, your tax credit is added to your monthly income which improves your debt-to-income ratio. In simple terms, an MCC enables you to afford a higher mortgage amount with the same amount of monthly debt expense.
The example below compares what size mortgage you can qualify for both with and without an MCC. The example uses an applicant with $5,000 in monthly gross income, $500 in monthly debt expense and uses a 43% debt-to-income ratio to determine the mortgage amount the applicant can afford. We also assume a 25% MCC in this case.
The first case below shows what size mortgage the applicant can afford without no MCC. In this scenario, the applicant can qualify for a $252,000 mortgage.
Mortgage Qualification With No MCC
Monthly Gross Income: $5,000
Amount Borrower Can Spend on Monthly Housing Expense and Debt (43% Debt-to-Income Ratio): $2,150
(-) Minus Monthly Debt: $500
Amount Borrower Can Spend on Monthly Housing Expense: $1,640
Mortgage Applicant Qualifies For: $252,000
The case below shows what size mortgage the applicant can afford with a mortgage credit certificate. As illustrated by this scenario, the applicant can qualify for a $266,000 mortgage with the MCC. This is because the $2,520 tax credit (25% of interest expense) increases the applicant's monthly gross income by approximately $210 per month, which significantly increases the mortgage amount the applicant qualifies for.
Mortgage Qualification With MCC
Monthly Gross Income: $5,000
(+) Plus Monthly MCC Benefit: $210
Monthly Gross Income Including MCC: $5,210
Amount Borrower Can Spend on Monthly Housing Expense and Debt (43% Debt-to-Income Ratio): $2,240
(-) Minus Monthly Debt: $500
Amount Borrower Can Spend on Monthly Housing Expense: $1,740
Mortgage Applicant Qualifies For: $266,000
As this example demonstrates an MCC can significantly increase the mortgage amount you qualify for which makes owning a home more attainable. We recommend that you review MCC details with a program provider to understand the eligibility guidelines and qualification requirements.
Mortgage credit certificate programs are administered by state and local housing departments in coordination with participating lenders. Borrowers apply for the MCC program through their local housing department or agency and apply for their mortgage with traditional lenders such as a bank, mortgage broker or credit union.
The table below shows mortgage rates and fees for leading lenders near you. We recommend that you contact multiple lenders to understand the programs they offer and to find the best loan terms. Shopping for your mortgage is the best way to save money on your loan.
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Sources
"Mortgage Credit Certificate Program Q&A." NCSHA. National Council of State Housing Agencies, February 26 2018. Web.
"B3-3.1-09, Mortgage Credit Certificates."  Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.
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