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How does MCC affect what size mortgage you qualify for?

How does an MCC affect what size mortgage you qualify for?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

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 deducted from your monthly debt expense to determine what size mortgage you can afford. The lower your monthly debt payments, 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 subtracted from your monthly debt expense which helps your debt-to-income ratio, enabling you to spend more on your mortgage payment and increasing the loan amount you qualify for. In simple terms, an MCC enables you to afford a higher mortgage amount with the same amount of monthly income.

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 45% 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 $291,000 mortgage.

Mortgage Qualification With No MCC

Monthly Gross Income: $5,000

Amount Borrower Can Spend on Monthly Housing Expense and Debt (45% Debt-to-Income Ratio): $2,250

(-) Minus Monthly Debt: $500

Amount Borrower Can Spend on Monthly Housing Expense: $1,750

Mortgage Applicant Qualifies For: $291,000

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 $331,500 mortgage with the MCC. This is because the $2,900 tax credit (25% of interest expense) increases how much the borrower can spend on total housing expense, including the mortgage payment, by approximately $245 per month, which significantly increases the mortgage amount the applicant qualifies for.

Mortgage Qualification With MCC

Monthly Gross Income: $5,000

Amount Borrower Can Spend on Monthly Housing Expense and Debt (45% Debt-to-Income Ratio): $2,250

(-) Minus Monthly Debt: $500

(+) Plus Monthly MCC Benefit: $245

Amount Borrower Can Spend on Monthly Housing Expense: $1,995

Mortgage Applicant Qualifies For: $331,500

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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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

Sources

Mortgage Credit Certificate Program: https://www.ncsha.org/resource/mortgage-credit-certificate-program-qa/

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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