Last Updated on March 10, 2021 by Filip Poutintsev
A mortgage is an agreement that allows you to borrow money from a bank or similar organization, especially to buy a house. Mortgages are also known as “liens against property” or “claims on property.
Mortgage Credit Certificate
Mortgage Credit Certificate (MCC) is a tax credit given by the IRS (Internal Revenue Service) to low and moderate-income homebuyers. MCC is a document provided by the originating mortgage lender to a borrower that directly converts to a portion of the interest paid into a non-refundable tax credit.
An MCC is a mortgage interest tax credit that reduces the amount of federal income taxes you pay every year. These certificates can be issued by a loan broker or the lender, but they are typically available to low-income buyers unless there are extenuating circumstances that apply. MCC is a homebuyer assistance program.
MCC allows borrowers to claim a dollar for dollar tax credit and in this way it reduces federal tax liability. The maximum limit of text credit is around $2000. Any interest you pay beyond the 20% or $2,000 becomes a tax deduction rather than a tax credit.
Generally, the program is only available to first-time homebuyers and homebuyers qualify for a loan because it reduces the tax liabilities hence the overall cost of your mortgage. Borrowers can receive a dollar-for-dollar tax credit for a portion of the mortgage interest they pay each year.
Mortgage credit certificates can be issued by either loan brokers or the lenders themselves and the allowable credit can vary with the state or local government issuing the MCC.
Who Qualifies for Mortgage Credit Certificate (MCC)?
MCC is a program that is primarily designed for first-time homebuyers that are also low-income buyers. It helps them to qualify for a home loan by reducing federal tax liabilities. The target audience of MCC is low-to-moderate income borrowers.
According to the Internal Revenue Service (IRS), “you may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government.”
Those who are planning to apply for the MCC program must look at the pros and cons of the MCC, which will help to decide whether MCC is going to be beneficial or not.
Pros of Mortgage Credit Certificate (MCC)
MCC is meant to promote more affordable housing and help more and is specially designed for the first-time homebuyer. Here are some advantages of MCC
1. Makes Mortgages Core Affordable
As the principal motto of MCC is to reduce the tax liabilities hence helps first –time home buyers to qualify or home loans. Even though you have to make the full principal and interest payment every month, you will be able to afford more with the tax credit. If you can budget properly, knowing that you’ll receive around 20% of the interest you pay back at tax time, you can take a mortgage payment that you may otherwise have difficulty affording.
2. You Can Qualify for a Mortgage Without Any Down Payment
There are chances where you can get a mortgage without any down payment. Some lenders might offer a mortgage credit certificate with a lending product that does not require you to pay a down payment to get into a new home. And preapproval for your lending product has become much easier and quicker and some lenders can do it within a few minutes.
3. MCC Offers Significant Tax Credit
The IRS allows mortgage credit certificate holders to write off as much as 20% of the interest they paid for the year. The actual amount varies by state and can vary between 20% and 40%, but most states have a 20% maximum. Besides, there is a dollar amount maximum of $2,000. Any interest you pay beyond the 20% or $2,000 becomes a tax deduction rather than a tax credit.
The tax credit directly reduces your taxable income, reducing your tax liability dollar-for-dollar.
4. Easy to Qualify as a First-Time Homebuyer With This Program
Usually, first-time homebuyers indicate someone who hasn’t owned a home before. A mortgage credit certificate defines first-time home buyers as those who have not owned home for the last three years. You can still qualify for the program if you are divorced and need a place to live or renting out another house. But the only mandatory condition is the buyer has not owned a home in the last three years.
5. Freedom to Use Any Type of Financing
Once you take out the first mortgage, the type of financing doesn’t matter. You can use the Mortgage Credit Certificate with conventional, FHA, VA, or USDA financing. The lender creates all the necessary paperwork and decides for themselves what programs they will offer it on. You can check the different lenders and their services, and pick the best one that suits you.
Cons of Mortgage Credit Certificate (MCC)
An MCC can be a great way to use your home to save money on your taxes, but there are some drawbacks as well as hidden costs. Here are some of the cons of MCC:
1. Not Everyone Benefits
Though MCC sounds like a great way to save money over the long term, many people who apply for an MCC end up disappointed.
Not everyone qualifies for the program as IRS imposes a strict income limit on qualification. First, to qualify, you must meet the income restrictions for your county. If your household makes more than the maximum allowed, you won’t qualify.
2. You May Owe Recapture Tax
Some homebuyers can owe a fee back to the federal government when they decide to refinance or sell their home. Under the following circumstances, you would need to pay back the tax credit which you received
- You are selling the house within nine years of purchasing it
- You are going to realize a profit from the sale of the property
- You have capital gains from selling the home
If you sell the home after nine years, you don’t have to worry about it
3. Normally for Buying Home for the First Time
MCC program is generally supposed to be for first-time homebuyers, and it also extends to people who haven’t owned a home in the last three years. If you just sold the home you lived in, you’re not going to be able to qualify for the MCC. If you’ve owned a home before, but you sold it and the closing date was more than three years ago, you could still get the MCC.
4. MCC is Much Stricter Than it Seems
You may not be able to buy a home just anywhere with the MCC as every state or local government has a different option for the credit and qualifications process. With MCC you can’t buy anything you like, you’re limited to a home that is priced in a range you can afford.
There are purchase price restrictions when you’re buying a house with a Mortgage Credit Certificate. Before you fall in love with a house and then find out you can’t afford to buy it, talk to your lender about the requirements for buying a house with the credit.
5. You Must have Your Mortgage Underwritten In a Specific Way
A mortgage credit certification must be underwritten according to the rules of the state and county where you intend to purchase a property. The mortgage must follow the rules according to the loan criteria imposed by the government.
Your lender may also be required to give all the information before the closing of your mortgage to help you understand your rights and responsibilities are with a mortgage credit certificate. If you do not complete the course, then you may not qualify for this tax credit.
Purchasing your own house can be an exciting and emotional process and is more beneficial than renting. But buying a house is not easy and it’s costly too but MCC can ease the initial financial burden of this process.
There are several restrictions and strings attached to this program such as MCC is primarily designed for first-time-house buyers. The certificate might be a perfect fit for some households, but it can also be unfit for others.
One must go through the benefits and drawbacks of MCC before deciding whether or not to use the MCC program so that it can save a lot of time and cost.