What is Mortgage Credit Certificate and How Can a Home Buyer Get the Benefits from MCC?
Mortgage Credit Certificate (MCC) is a tax credit which is issued by your state or local governments give to the home buyer during a given tax year. When the home buyer pays mortgage interest to the lender (bank) a small portion of the mortgage interested is issued as a tax credit.
How do I use MCC?
First time homebuyers can take advantage of this by offsetting a portion of the home loan interest for a new mortgage they would qualify for. Please note that this is a tax credit not a tax deduction.
So when you are qualifying for a new home purchase, the lender can calculate the tax credit issued to you by local or state governments, this estimated amount of the credit would be applied on a monthly basis as your income, thus helping you to qualify for the loan and/or borrow an amount to afford a larger loan amount to afford a better home for your family.
Examples of Qualification for MCC
There are several minimum qualification requirements for MCC for a homebuyer, which are as follows:
1. In the past 3 years, you did not own a home
2. There is specific restrictions on purchase price for the home and income requirements for the buyer
3. The new home cannot be an investment property or special use property or for business – must be a primary residence for the homebuyer
In the event of a natural disaster or other local redevelopment push by the state or local government, these restrictions and/or other qualifications may be temporarily increased or decreased --- so check with your lender to find out more about MCC qualifications for your area.
MCC approved by state or local governments allows the homebuyer to qualify for a little larger loan amount because the credit is applied to increase the homeowners monthly income as tax credit, thus the homeowner can purchase a more expensive home. MCC credits can be used for FHA, USDA, and VA home loans. A savvy homebuyer can leverage MCC tax credit to deduct it from the mortgage interest and even reduce tax liability, dollar for dollar, by a percent of home loan interest paid to the lender.
Each state or local government that issues MCC tax credits to a homebuyer has different rates, the maximum cap for MCC credit is $2,000 per year, if the State’s rate is 20% by the IRS.
Assume the homebuyer is purchasing a $300K home loan for a 30 years rate of 5%, the tax credit would be estimated as follows:
• Home loan interest paid (1st year) : $15,000
• MCC Credit Rate: 30%
• Total Credit Applied would be approximately: $5,000
Please note that because the IRS limit is set at $2,000 per year, the homebuyer would be maxed at $2,000 credit on their tax return. Please note that the homebuyer will continue to receive an MCC tax credit on the mortgage interest as long as they reside in the home and continue to pay the home loan.