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How a Mortgage Credit Certificate Works
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How a Mortgage Credit Certificate Works

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

The Mortgage Credit Certificate (MCC) Program provides qualified borrowers a federal income tax credit based on a percentage of their annual mortgage interest expense.  The MCC tax credit reduces the borrower's federal income taxes which improves your ability to qualify for a mortgage.  The amount of the tax credit ranges from 15% to 50% of annual interest expense depending on the borrower's city and state, gross income level and if the property is located in a federally designated targeted area.  Lower income individuals and individuals purchasing properties in targeted areas are eligible to receive the higher credit.  Please note that some mortgage credit certificate programs cap the amount of tax credit that borrowers can receive.

Mortgage credit certificate programs are administered by state and local housing commissions or agencies in conjunction with participating lenders. Borrowers apply for the program through their local housing commission and apply for their mortgage with traditional lenders such as a bank, mortgage bank or mortgage broker.  The program requires the lender to prepare an MCC application, which requires additional work on the part of the lender.  Some lenders may not want to do the additional work.  If you have any issues with uncooperative lenders you should report them to your housing commission.  It is your right to be able to be able to access the program. 

Depending on your tax bracket, a tax credit is typically better than a tax deduction because it reduces the borrower's tax bill on a dollar-for-dollar basis.  For example, a borrower with a $10,000 federal tax bill and $2,500 mortgage credit certificate only pays $7,500 in federal taxes.  Like any other mortgage, the borrower can deduct the portion of annual interest expense that is not covered by the MCC  from his or her income gross income for federal income tax purposes, which provides an additional tax benefit.

Participating borrowers receive the MCC for the life of the mortgage as long as they occupy the property as their principal residence.  You do not need to re-apply for the credit after you have received it and your loan closes.  Please note that borrowers may be subject to recapture tax if they sell the property for a profit within nine years, which basically means the borrower has to pay back some of the benefit they received from the tax credit.  Payment of the recapture tax depends on the borrower's gross income for the year in which the property is sold.

How a Mortgage Credit Certificate Works

The example below compares a mortgage with an mortgage credit certificate to a mortgage without a credit and demonstrates how the program reduces a borrower's federal taxes.  The example assumes the borrower has a $250,000 mortgage with a 4.00% interest rate which means the borrower pays approximately $10,000 in interest expense for the first year of the mortgage.  The example assumes a 25% MCC which means the borrower receives a $2,500 credit that is subtracted from his or her federal tax bill ($10,000 in interest expense * 25% MCC = $2,500 tax credit).  The remaining $7,500 in interest expense is deductible against the borrower's gross income.

As illustrated by the example, the MCC saves the borrower $2,125 in federal taxes. Please note that the example below outlines one scenario and mortgage credit certificate tax benefits vary depending on the interest rate, credit rate, possible limits on the credit amount and your tax bracket.

Assumptions
Mortgage Amount
$250,000
Interest Rate
4.0%
First Year Mortgage Interest
$10,000
MCC Credit (%)
25%
MCC Credit ($)
$2,500
No MCC
With MCC
Taxable Income
$50,000
$50,000
Mortgage Interest Deduction
$10,000
$7,500
Taxable Income After Deduction
$40,000
$42,500
Federal Tax Bill (@ 15% Bracket)
$6,000
$6,375
Less MCC Credit
NA
$2,500
Federal Taxes Owed
$6,000
$3,875
Tax Savings from MCC Program
 
$2,125

Borrowers should consider reducing their federal income tax withholding to account for the benefit of the tax credit. Reducing your tax withholding enables you to increase your net income or take-home pay.  We highly recommend that borrowers consult a tax specialist to ensure that any changes to your tax withholding are done correctly.

How a Mortgage Credit Certificate Helps You Qualify for a Mortgage

One of the main benefits of the MCC program is that the tax credit is added to you monthly gross income to calculate the debt-to-income ratio that is used to determine the mortgage you can afford. A debt-to-income ratio represents the maximum acceptable percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus other monthly debts such as credit card, auto and student loans.

Most lenders apply a maximum debt-to-income ratio of 43% - 50% to determine what size mortgage borrowers qualify for which means you can spend 43% - 50% of your monthly gross income on total housing expense plus other debt. With a mortgage credit certificate, lenders add the monthly tax credit to your gross income which improves your debt-to-income ratio and enables you to spend more on total monthly housing expense, including your mortgage payment.  In short, the higher your monthly gross income, the higher the mortgage amount you can afford. 

How a Mortgage Credit Certificate Enables You to Afford a Larger Mortgage

The example below demonstrates how a mortgage credit certificate enables borrowers to qualify for a larger mortgage amount.  The example uses a borrower with $3,500 in monthly gross income and $300 in monthly debt and applies a 43% debt-to-income ratio to determine what size mortgage the borrower can afford.  This example assumes a 25% MCC and a 30 year fixed rate mortgage with a 4.000% interest rate.

In this example, the borrower can afford a $195,000 mortgage with the MCC as compared to a $185,000 mortgage without the credit. This is because the $1,850 MCC increases the applicant's monthly gross income by $155 ($1,850 annual MCC / 12 months = $155 increase in monthly income), which enables the borrower to afford a higher mortgage amount.

No MCC
With MCC
Borrower Monthly Gross Income
$3,500
$3,500
+ Monthly MCC Tax Credit Benefit ($1,850 Annual Credit / 12)
NA
$155
Monthly Gross Income Used for Mortgage Qualification
$3,500
$3,655
Amount Borrower Can Spend on Monthly Housing Expense and Debt
$1,505
$1,570
- Borrower Monthly Debt
$300
$300
Amount Borrower Can Spend on Monthly Housing Expense
$1,205
$1,270
Mortgage Amount Borrower Can Afford
$185,000
$195,000
Difference with MCC Program
 
$10,000

FREEandCLEAR recommends that you consult your local housing commission and lender to determine the mortgage and home you can afford with an MCC

Please note that the mortgage amount you can afford using a mortgage credit certificate varies depending on your mortgage rate, tax credit, debt-to-income ratio, borrower qualification guidelines as well as other potentially applicable housing expenses such as mortgage insurance and homeowners association (HOA) fees.  Additionally, home buyers are required to pay for their down payment, closing costs and potentially maintain savings in reserve after the purchase closes, which can be significant expenses.  Although the mortgage credit certificate program makes buying a home more affordable, what price home you can afford depends on your ability to qualify for a mortgage and pay for these other costs.

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Are You Eligible for a Mortgage Credit Certificate?

Borrower Eligibility

Applicants must meet credit score, income and mortgage requirements of the lender and complete a HUD-certified homebuyer education course prior to loan closing.  The borrower must be a first-time homebuyer (no ownership in a principal residence within the last three years) and occupy the home as a principal residence.  Exceptions to the first-time home-buyer requirement include if the property is located in a federally designated targeted area and if the borrower is a qualified veteran under the Heroes Earning Assistance and Relief Tax Act of 2008.

Loan Type

Single family properties including detached homes, condominiums or townhouses are eligible for the mortgage credit certificate program. FHA, VA or conventional loans with fixed or adjustable rates are allowed according to program guidelines.

Borrower Income Limit

An applicant's household gross income cannot exceed the MCC income limit. Maximum household gross income is defined as a percentage of the area median income (AMI) with the income limit varying depending on the number of people in the borrower's household. For a typical mortgage credit certificate program, an eligible borrower can have a maximum household gross income of 140% of the area median income although borrowers with lower incomes (~80% or less of the area median income) qualify for higher credits.

Property Price Limit

The sales price of the property must be less than the maximum mortgage credit certificate purchase price in the county in which you are purchasing the property. The maximum property purchase price varies depending on if the property is in a federally designated targeted area, with properties in targeted areas having the highest maximum purchase price limit.  Properties located in targeted areas are also eligible for the higher credit amount.

The income and purchase price limits vary by county so contact your state or local housing agency or commission to determine the details of the mortgage credit certificate program available to you.

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Related FREEandCLEAR Resources

Sources

"Mortgage Credit Certificate Program Q&A."  NCSHA.  National Council of State Housing Agencies, February 26 2018.  Web.

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.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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