A Mortgage Credit Certificate (MCC) entitles qualified home buyers to reduce the amount of their federal income tax liability by an amount equal to a portion of the interest paid during the year on a home mortgage. This tax credit allows the buyer to qualify more easily for a loan by increasing the effective income of the buyer. The Riverside County MCC Program provides for a twenty percent (20%) rate which can be applied to the interest paid on the mortgage loan. The borrower can claim a tax credit equal to 20% of the interest paid during the year. Since the borrower’s taxes are being reduced by the amount of the credit, this increases the take-home pay by the amount of the credit. The buyer takes the remaining 80% interest as a deduction. When underwriting the loan, a lender takes this into consideration and the borrower is able to qualify for a larger loan than would otherwise be possible. The following table illustrates how a MCC increases a borrower’s “effective home buying power”:
|Effective Home Buying Power With and Without an MCC|
|Without MCC||With MCC|
|First Mortgage Amount||$300,000||$300,000|
|Mortgage Interest Rate||5%||5%|
|Monthly Mortgage (Principal & Interest Only)||$1,610||$1,610|
|Monthly Credit Amount||N/A||$250|
|“Effective” Monthly Mortgage Payment||$1,610||$1,360|
|Annual Income Needed *||$69,011||$58,295|
* Annual Income Needed is based on monthly Principal and Interest (P&I) not exceeding 28% of monthly income.
How does a Mortgage Credit Certificate actually work?
Assume the homebuyer bought a home with a mortgage amount of $300,000 with an interest rate of 5% with the monthly mortgage payment of $1,610 as illustrated in the previous page.
(1) The homebuyer would pay a total of $300,000 x 0.05= $15,000 of interest in the first year (Loan amount x interest rate).
(2) Because the homebuyer has a Mortgage Credit Certificate, the homebuyer could receive a federal income tax credit of $3,000 (20% x $15,000). If the homebuyer income tax liability is $3,000 or greater, the homebuyer will receive the full benefit of the MCC tax credit. If the amount of homebuyer tax credit exceeds the amount of his/her tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability.
(3) The remaining 80% of the mortgage interest or $12,000 ($15,000 less $3,000) qualifies as an itemized income tax deduction.
(4) To receive immediate benefit of the MCC tax credit, the homebuyer would file a revised W-4 withholding form with the homebuyer’s employer to reduce the amount of federal income tax withheld from his/her wages and increase homebuyer’s take home pay by $250 per month ($3,000/12 )
(5) By applying the increase in the homebuyer take home pay of $250 towards his monthly mortgage payment of $1,610, his effective monthly payment becomes $1,360 ($1,610 minus $250).
“Tax Credit” vs. “Tax Deduction”
A “tax credit” entitles a taxpayer to subtract the amount of credit from their total federal tax bill whereas a “tax deduction” is subtracted from adjusted gross income before federal income taxes are computed.
What happens if the homebuyer cannot use the entire amount of the MCC credit for the year in which it applies?
If the amount of the MCC exceeds the homebuyer’s tax liability, the unused portion of the credit can be carried forward to the next three years or until used, whichever comes first.
Time Period of the Mortgage Credit Certificate
The MCC is in effect for the life of the loan as long as the home remains the borrower’s principal residence. The MCC is not transferable to a new loan when refinancing, nor can it be assigned or transferred to a new buyer or another home. In addition, the MCC Program includes a nine year recapture provision which provides for a return of tax credits taken if the property ceases to be the borrower’s primary residence within nine years from the close of escrow. The amount of tax recapture is determined by formula, and provided to the borrower at the time the application is taken. After expiration of the nine year period, the borrower may dispense of the property without incurring penalty, but would lose the future benefits of the MCC.
Qualifying for the MCC Program
The three basic qualifications are:
(1) The borrower must be a first time Home Buyer;
(2) The borrower’s annual income must fall within the program income limits; and
(3) The home being purchased must fall within the program purchase price limits. If the home is located in a Target Area, then the first-time buyer limitation does not apply and the income and cost limits are higher.
First-time Homebuyer definition
A first time Homebuyer is defined as a person who has not had an ownership interest in improved-upon residential real property for the previous three (3) years.
The residence purchased in conjunction with a MCC must be the borrower’s principal residence and may not be used as a business or vacation home. The home may be a detached or attached single family home, condominium unit, a co-op unit, or a manufactured home on permanent foundation (new or re-sale).
Applying for a Mortgage Credit Certificate
Borrowers must apply for a MCC through a Participating Lender. The Participating Lender will perform an initial qualification and assist the borrower in completing the MCC submission forms. The Lender then submits the MCC application to the County. The County reviews the Borrower’s qualifications and, if they meet the program guidelines, issues a letter of commitment to the Lender. The Commitment Letter must be issued prior to the close of the loan. The loan must close within 60 days of the commitment. Upon loan closing, the Lender submits the MCC Closing package to the County and the County issues the MCC, with the Lender and borrower each receiving a copy. The borrower may then claim the tax credit on their Federal Income Tax Returns. The borrower can receive the money annually as a tax refund or adjust his or her W-4 withholding form to receive the benefit via an increased pay check.
The loan terms depend on the Lender and type of loan you use. Depending on the mortgage marketplace and the borrower requirements, each Lender can set its own interest rate, length of mortgage term, down payment requirement, fees, points, closing costs and other loan terms. MCC’s may be used with conventional, fixed, 30-year term loan, including FHA, VA, FNMA, FHLMC and privately insured loans.