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Mortgage  Question?
Does MCC tax credit reduce my debt-to-income ratio?

Does the MCC tax credit reduce my debt-to-income ratio? I am pre-approved for a mortgage with a 50% debt-to-income ratio and am concerned this is too high to qualify for the MCC Program.

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Most MCC programs do not have maximum debt-to-income ratio limits so if your lender approved you for a mortgage with a 50% debt-to-income ratio then you should be fine on that point when it comes to applying for the MCC. Please note that MCC programs typically have other eligibility requirements including borrower income and asset limits, participants must be first-time home buyers (not owned a home in the past three years) unless the borrower is a veteran or the property is located in a designated area and the property must be an owner-occupied single family residence such as a home or a condo. Most programs also have property purchase price limits that vary depending on where the property is located.  We provide a comprehensive overview of the MCC Program on FREEandCLEAR.

Although most MCC programs do not impose debt-to-income ratio limits as an eligibility requirement, one of the main benefits of the MCC program is that the tax credit is subtracted from your total monthly housing expense, which lowers your debt-to-income ratio. For example, if your estimated monthly housing expense before the MCC is $2,000 and you are eligible for a $2,400 MCC tax credit, the lender subtracts $200 ($2,400 MCC / 12 months) from your monthly housing expense to determine your debt-to-income ratio and what size mortgage you qualify for.  Reducing your monthly housing expense lowers your debt which lowers your debt-to-income ratio. A lower debt-to-income ratio enables you qualify for a larger mortgage amount.  Returning to the example, with the MCC program, instead of spending $2,000 on monthly housing expense you can actually spend $2,200 (because the $200 MCC tax credit is subtracted to calculate your debt-to-income ratio) which means you can spend more on your mortgage payment and afford a larger mortgage than you could without the program.

MCC programs are administered by local housing commissions and program policies and guidelines vary by city and state. We recommend that you you contact your local housing commission to understand its MCC program eligibility requirements. To contact your housing commission visit the HUD web site, select your state and then click "Learn About Home Ownership" to be directed to information about mortgage assistance programs in your state.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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