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Mortgage Credit Certificates (MCCs) Help First-Time Homebuyers

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Most people know that mortgage interest is tax deductible. That's great if you're one of the 35% of taxpayers who itemize their tax deductions on Schedule A. If you're one of the 65% of taxpayers who take the standard deduction, though, paying mortgage interest instead of rent doesn't cut your debt to Uncle Sam.

What Is a Mortgage Credit Certificate (MCC)?

Even if you don't itemize your deductions, you can take advantage of some of the provisions of a Mortgage Credit Certificate (MCC). The MCC program was created by the federal government, but the certificates are issued by state and local governments. You have to get your home loan from mortgage lenders that participate in the program. Each locale has a list of approved providers, and most of these can be found online. You probably want to get yours as soon as possible; programs can run out of money fairly quickly.

Who Qualifies for MCCs?

Eligibility depends on where you live; each issuing community or state creates its own criteria. But in general, you must be a "first-time" homebuyer (someone who has not owned a primary residence in at least three years), the new property must be your primary residence, and there are limitations on the amount of income you can earn, and how much you can spend for the house.

How the MCC Works

With an MCC, the IRS allows you to not only deduct your mortgage interest on Schedule A (if you choose to itemize), but also take a credit of up to 20% of your mortgage interest against your tax liabilities (by filing IRS form 8396). Your tax professional will tell you that tax credits can save you a lot more than tax deductions. For example, if you get your new home under contract by April 30, 2010, and close on your purchase by June 30, you can also take advantage of the first-time homebuyer tax credit (of up to $8,000).

But that's not all, your mortgage lender deducts the amount of the credit from your house payment when calculating your debt-to-income ratios. This can help you qualify for a larger loan than you otherwise could. Here's an example:

  • You get a $250,000 home loan at 6.00% for 30 years. Your monthly principal and interest payment is $1,499. Assume that you get an MCC credit rate of 20%.
  • During year one, you'd pay a total of $14,916 in mortgage interest. However, because you have an MCC, you are eligible to receive a federal income tax credit of $2,983 (20% of $14,916). The credit is not refundable -- this means that your tax liability has to equal or exceed the amount of the credit for you to take full advantage of it. If your income tax liability is $2,983 or greater, you can take the full MCC tax credit when you file your taxes that year. If the amount of your MCC is more than your tax bill, you can carry the unused portion forward for up to three years to offset future income taxes.
  • The remaining 80% of your mortgage interest, or $11,933, qualifies as an itemized income tax deduction.
  • You don't need to wait until tax time to get your MCC money. To immediately benefit, you could file a revised W-4 withholding form with your employer. By reducing the amount of federal income tax withheld from your wages, you could increase your take-home pay by $249 per month ($2,983 divided by 12).
  • Your mortgage lender can apply $249 towards your monthly mortgage payment of $1,499, and calculate your effective monthly payment at $1,250 ($1,499 minus $249).
  • This means that a borrower who needed $64,243 to qualify for that mortgage without an MCC would only have to earn $53,571 with an MCC. The credit helps people qualify for a better house by increasing their take-home pay.

So when shopping for your mortgage, check with your state or community to see if you qualify for an MCC. If you already have one and want to refinance, you may be able to get your MCC reissued so that you don't lose your tax benefits. Keep in mind that if you sell the home only a few years after buying it, you could be required to repay some of the subsidies provided by the MCC -- the certificates work differently depending on where you live. Make sure your mortgage lender is approved to lend mortgages with MCCs, and tell them that you have a certificate before applying for your new home loan.

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

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