Mortgage Credit Certificate (MCC): How it can help you afford your mortgage payments

Have you been avoiding homeownership because you’re worried about all the costs involved? Here’s a potential breath of fresh air for first-time home buyers: The Mortgage Credit Certificate (MCC), a government-backed tax credit program, might make all the difference in helping you out.

But what is an MCC program tax credit for home buyers, and who does it benefit? Let’s explore everything you need to know about MCCs, their basic mechanics, and more.

What is a Mortgage Credit Certificate?

An MCC is a federal tax benefit issued by a state housing finance authority. It helps low- and moderate-income first-time home buyers reduce the amount they owe at tax time through a tax credit. This tax credit can make housing payments more affordable and can help those who may not normally qualify for a mortgage.

How does it make housing payments more affordable? You can adjust your paycheck withholding to reflect the tax credit throughout the year, potentially giving you extra money to cover your mortgage payment each month.

What exactly is a tax credit? Tax credits lower your tax bill on a dollar-for-dollar basis, which means they lower your tax bill directly. For example, a $2,000 tax credit reduces your tax bill by $2,000.

Tax credits differ from deductions, which reduce your taxable income. For example, let’s say your income is $100,000. If you have $2,000 in deductions, your taxable income is $98,000. A $2,000 tax credit saves you more money than a $2,000 deduction.

How do Mortgage Credit Certificates work?

State or local housing agencies issue MCCs. You can take a tax credit equal to the interest paid on your mortgage loan each year at the time you file your tax returns.

You can claim a percentage (usually 20% – 40%) of your annual mortgage interest as a tax credit (up to $2,000 per year) – the amount differs from state to state. The rest of the interest may be tax deductible.

Here’s an example: Let’s say you purchase your first home and owe $15,000 mortgage interest in your first year of owning your home. You can deduct all of the $15,000 in mortgage interest, assuming the standard deduction isn’t a better tax strategy. If you get an MCC, you can deduct $13,000 of the mortgage interest and receive a $2,000 tax credit.

You can receive the MCC tax credit for the life of the mortgage as long as you’re living in your principal residence and as long as you complete IRS Form 8396 every year to claim the credit.

Who qualifies for an MCC?

You can qualify for an MCC if you:

• Are a first-time home buyer (or haven’t been a homeowner over the past 3 years)
• Adhere to income and purchase price limits based on the local housing market
• Live in the home as your primary residence
• Participate in new home buyer counseling if your state’s MCC program requires it
• Obtain a mortgage through a participating lender 

There are exceptions to these requirements if you’re a veteran or if you purchase a home dubbed by the federal government in a designated “targeted area.” Check with your lender or local housing agency for qualification details, as program availability varies by state.

How to apply for an MCC

Here’s a quick tutorial on how to apply for MCC benefits:

• Talk to your lender: First, ask your lender early in the mortgage process if they work with MCC programs. Your lender can answer any questions you have about MCCs.
• Apply: After checking your eligibility, your lender will then apply to your local Housing Finance Agency for the certificate on your behalf.
• Pay fees: You’ll then pay any fees (usually $100 – $500) at closing.
• Receive your MCC: Ultimately, you’ll receive a physical MCC. Retain your certificate for tax filing so you can benefit from the MCC.
• Claim your credit: Use IRS Form 8396 to claim the credit each year. You may want to work with your accountant to ensure everything is in order.

The application must be completed before closing on the mortgage, so it’s wise to start the conversation early on with your lender.

Should you get an MCC if you're eligible?

Is an MCC a smart move for you? Let’s walk through a few pros and cons before you decide whether or not it’s the right option for you.

A few benefits of MCCs include:

• Tax savings: An MCC can provide long-term tax savings. In addition to the dollar-for-dollar benefit, you can also take advantage of tax savings throughout the life of your loan.
• Helps lower-income families and offers flexibility: An MCC can make homeownership more affordable for those with limited income. In addition, buyers affiliated with the military and those applying in federally targeted areas may be able to take advantage of an MCC.
• Allows for broad eligibility: You can use them for just about any type of first mortgage loan, such as a conventional, FHA, or another type.
• Higher loan amount potential: MCCs may help you qualify for a higher loan amount. 

The downsides include:

• Recapture tax: The IRS may impose a recapture if the borrower sells the home within 9 years of purchase, if you earn significantly more income than when you bought the home, and if you receive a gain from the home.
• Adds complexity: MCCs add complexity to taxes, which may not be worth it for those in higher income brackets or who plan to refinance quickly.
• Can run into challenges when refinancing: You can still keep your MCC but you must reapply for a reissue and it also must meet certain requirements.
• Nonrefundable: You can use MCCs to reduce your tax burden to $0, but you can’t receive a refund beyond that.
• Fees: You’ll pay a one-time fee at closing. You may be able to get a fee waiver or reduce the fee if you get an HFA first-lien mortgage product at the same time. The amount you will pay varies by state.

Consult with a mortgage advisor or tax professional to evaluate whether an MCC will benefit you. Also, work with a tax professional to ensure you’re claiming your tax benefits in the right way.

FAQ

How much money can an MCC save me?

You’ll typically save $1,000 – $2,000 per year, and the cap is $2,000 annually for most borrowers. Your lender can give you more information about the details and mortgage tax savings for your particular situation.

Can I get an MCC even if I’ve owned a home before?

Yes, if you haven’t owned a home in the last 3 years or if you're a veteran, you can generally get an MCC. Some targeted areas allow repeat buyers to qualify, so check with your lender to learn more about the required qualifications in your state.

How do I find out if my state offers MCCs?

Check with your state housing finance agency or ask area lenders about MCCs. Program names and eligibility rules vary, so it’s important to get clear on your state’s MCC eligibility rules, fee requirements, and more. Also check into other first-time home buyer tax credits in your area.

What happens to the MCC if I sell my home?

The MCC ends when you sell your home. However, note that you may also be subject to a federal recapture tax. A recapture tax may apply to homeowners who sell a home purchased with certain types of federally subsidized loans or assistance programs within a specific time frame. If you meet certain conditions, the purpose of this tax is to recapture or repay a portion of the benefit received from the subsidy.

The bottom line: MCCs can offer real savings for those who qualify

So, now that you know the answer to “What is an MCC?”, does a mortgage credit certificate seem like a win-win for you? It can be for the right home buyer. MCCs are powerful but underused tools for making homeownership more affordable.

Whether your goal is annual tax savings, to get a lower debt-to-income ratio, or better loan terms, you may want to look into this option. Check with lenders in your area to determine whether your state offers MCCs and work with a tax professional to ensure you’re squeezing out the most benefits at tax time.

Learn more about buying a home, particularly if you’re wondering how to buy a house with low income.