How does a mortgage credit certificate (MCC) work?
Mortgage credit certificates (MCCs) help first-time homebuyers and other qualified homeowners afford their mortgages by allowing them to claim a credit on their federal tax return — the mortgage interest credit — worth a portion of the mortgage interest they paid, up to a maximum of $2,000.
Each state has a Housing Finance Authority (HFA) that may issue MCCs as part of a mortgage credit certificate program, usually along with or as part of other homebuyer programs for the residents. Not all states offer MCCs.
An MCC allows a homeowner to claim a tax credit for some, but not all, of the mortgage interest paid during the year. MCCs may be worth anywhere from 10% to 50% of the interest you paid, depending on the rate your state sets, but 20% is common. The tax credit directly lowers your tax liability, which is how much federal tax you owed for the year.
The best way to understand how the mortgage credit certificate works is through an example. Let’s say you buy a house and get an MCC with the following particulars:
Mortgage loan amount: $300,000
Interest rate: 3.50%
Mortgage interest paid: $10,000 (estimated total for the first year)
Mortgage credit certificate rate: 20% (set by the state)
In this example, with an MCC rate of 20%, you are eligible to claim a tax credit worth up to $2,000 (20% of $10,000 paid in mortgage interest). That means when you file your federal taxes, you may be able to directly lower your tax liability (how much you owed for the year) by $2,000.
What happens if I sell my house or refinance?
If you make a profit from selling an asset and it provides a tax benefit, you may have to pay something called a recapture tax to the IRS.
Homeowners may be subject to recapture tax, which is only a portion of the gain, in the following conditions:
They sell their home before nine years have passed
They earn a capital gain from the sale of the home
They earn significantly more income at the time of sale than they did at the time they bought the home
Because all three conditions must be met, the risk of having to pay the recapture tax is relatively low for most homeowners.
If you refinance your mortgage, you may still be able to get a mortgage credit certificate. You’ll have to reapply for it again with an approved lender. Because refinancing means taking out a new mortgage to pay off the old one, the refinance may have to follow certain terms in order to be eligible, like not refinancing for a larger loan amount. Ask your loan officer for more information.
Who qualifies for a mortgage credit certificate (MCC)?
In order to qualify for a mortgage credit certificate, you must be a first-time homebuyer and meet the MCC program's income and purchase limits, which vary by county and household size.
Anyone who has not owned a home in three years is considered a first-time homebuyer. Every state has their own requirements, which are designed to help low- and middle-income buyers, and a few states do not have a mortgage credit certificate program at all. The income limit may range from $60,000 to $90,000 for one to two person households, and the income of a spouse whose name isn’t on the mortgage may still count towards the MCC limit. The purchase price of the house must also fall under a certain amount for the buyer to qualify for an MCC.
If you are interested in an MCC, but you earn more than the income limit and you are not a first-time buyer, then you might consider a home in a targeted area. These areas are designated by the state or Department of Housing and Urban Development and tend to have a more lenient (expanded) income limit.
Since the MCC is not a loan, you do not need a certain credit score to qualify.
According to the FDIC, there are several requirements for getting a mortgage credit certificate, including:
Borrower criteria
Income and sales price limits will vary by state.
Mortgage credit certificates are only available to first-time homebuyers except for borrowers buying a home in certain areas determined by the U.S. Department of Housing and Urban Affairs, as well as members of the military and veterans.
The home must be used as a buyer’s primary residence.
Depending on the laws in your state, you may be required to have some form of homebuyer education to qualify.
Program criteria
Refinances typically are not eligible for mortgage credit certificates.
If a homeowner currently has a mortgage credit certificate and refinances, there may be programs that allow the borrower to apply for a new mortgage credit certificate depending on the laws in your state.
How do I apply for a mortgage credit certificate (MCC)?
If your state has an MCC program and you are eligible for it, you will apply when you take out a mortgage loan. You must go through a participating lender that's been approved by the state Housing Finance Authority.
Since not all states offer MCCs, checking out first-time homebuyer programs is a good place to start.
In many states, applying for a qualified mortgage credit certificate does not prohibit you from applying for other homebuyer programs, like closing cost or down payment assistance.
Keep in mind that if you are issued a mortgage credit certificate you will still need to claim the credit on your annual return to get any benefit or potential tax saving.
How the mortgage interest credit works
Getting a mortgage credit certificate allows you to claim the mortgage interest tax credit. The mortgage interest credit is a nonrefundable credit, which means the amount you get from it cannot be worth more than the amount of income tax you owed for the year. So even if you qualify for a nonrefundable credit worth $2,000, you won’t get the full amount unless you owed at least $2,000 of federal income tax that year. If you don’t owe any income tax for the year, then you don’t qualify to claim any of MCC credit that year. That means people who don’t have much tax liability stand to benefit less from this credit.
Unused tax credit will rollover for the next three years. Remember, you can still get a tax refund check from the IRS even if you don’t get the full value of the credit. Everyone’s tax situation is different. To see what tax savings you would get with an MCC, talk to a professional or learn more about filing taxes with our guide.
The mortgage interest credit & the mortgage interest deduction
Additionally, some homeowners can claim the mortgage interest deduction if they itemize their deductions instead of taking the standard deduction. If you claim the mortgage interest deduction, the amount you can deduct is reduced by the amount you claimed for the mortgage interest credit. In our earlier example, you would be eligible to deduct up to $8,000. ($10,000 in total mortgage interest paid minus $2,000 claimed as mortgage interest credit.)
Here's a refresher on tax deductions vs credits
How to claim the mortgage interest credit on your taxes
You must claim the MCC tax credit every year on your federal tax return by completing IRS Form 8396, Mortgage Interest Credit and attaching it to your annual tax return.
You will need the following information from your certificate:
Mortgage credit certificate number
The date it was issued
Name of the issuer of the mortgage credit certificate
On Form 8396, you must enter the amount of interest you paid on the mortgage loan (referred to as the certified indebtedness amount). You can find this number on Form 1098, Mortgage interest Statement, which you should have received in the mail from your lender. This is multiplied by your state’s MCC rate to calculate the credit amount you’re eligible for, with a maximum possible mortgage interest credit of $2,000.
Next, you will account for and add any credit carrying over from the past three years. The final credit amount should be entered on Schedule 3.
If you itemize your deductions, you will need to make adjustments to Schedule A to reduce the home mortgage interest deduction.
Keep in mind that tax laws change from year to year, so it is important to verify what forms you need to file with your accountant or through the IRS website.
