To make homeownership more affordable, the federal government offers programs for first-time homebuyers and buyers with low to moderate incomes. The mortgage credit certificate (MCC) program is one option that helps eligible first-time homebuyers save money on their mortgage.
This guide will unpack how a mortgage credit certificate works, the pros and cons, and claiming it on your taxes.
What Is an MCC?
A mortgage credit certificate, sometimes called a mortgage certificate credit, is designed to help homebuyers recoup a portion of the interest paid on their home mortgage loan. An MCC is a dollar-for-dollar federal tax credit of up to $2,000 on the mortgage interest paid annually. It’s a nonrefundable credit, which just means that the amount of your credit can’t exceed the amount of income tax owed for that filing year.
If you take out a mortgage to buy a home, your monthly payment has four components: principal, interest, taxes, and insurance. State and local housing finance agencies issue MCCs, and if you receive one you can claim the dollar equivalent as a tax deduction to reduce the amount you owe in federal taxes. (Not all states offer MCCs, however. Michigan offers one, for example, while Massachusetts does not.) Eligible homeowners can take advantage of an MCC even if they take the standard deduction rather than itemize deductions. If you are one of the few homeowners who itemizes, any remaining mortgage interest not accounted for in an MCC may qualify for the mortgage interest deduction.
Eligibility for this program is based on income and is generally only available for first-time homebuyers who qualify, though others may be able to buy a home in a “targeted area” designated by the state or Department of Housing and Urban Development and claim a mortgage tax credit.
Keep in mind that different mortgage types may have fixed or variable interest rates. Most fixed-rate loans are eligible for an MCC.
Recommended: First-Time Homebuyer Guide
How Does It Work?
Getting a handle on tax credits and deductions can be confusing as a new homeowner, and that’s OK.
To reiterate, an MCC lets you claim a tax credit for a portion of the mortgage interest paid in a year. This lowers your tax liability, which is the amount you owe to the federal government.
The portion of the mortgage interest you can claim with an MCC, known as the tax credit percentage, depends on the state you live in. Generally, the tax credit percentage ranges from 10% to 50% of a homeowner’s total annual mortgage interest.
The tax credit percentage, the mortgage amount, and interest rate are needed to calculate the total MCC. Note, however, that an annual MCC deduction is capped at $2,000 and can’t exceed a recipient’s total federal income tax liability after factoring in other deductions and credits.
It’s helpful to show how claiming an MCC works in practice. You’ll need to know some mortgage basics, like the interest rate, before getting started.
For instance, a homeowner with a $250,000 mortgage, 3.5% interest rate, and tax credit percentage of 20% could receive a first-year MCC tax credit of $1,750.
Here’s how to break this calculation down by steps:
1. Determine the mortgage loan balance ($250,000), interest rate (3.5%), and tax credit percentage (20%)
2. Multiply the loan balance and interest rate to calculate the total interest paid ($250,000 x 0.035 = $8,750)
3. Multiply the total interest paid by the tax credit percentage to calculate the MCC tax credit ($8,750 x 0.2 = $1,750)
The $1,750 would be applied to your total federal tax bill, rather than deducted from your income. Let’s take a closer look at how claiming an MCC in this example would affect your federal income taxes.
| With an MCC | Without an MCC | |
|---|---|---|
| Income | $70,000 | $70,000 |
| Mortgage Interest Paid | $7,000 (total mortgage interest – MCC tax credit) | $8,750 |
| Taxable Income | $63,000 | $61,250 |
| Federal Taxes Owed (22% tax rate) | $13,860 | $13,475 |
| MCC Tax Credit | $1,750 | 0 |
| Total Federal Tax Bill | $12,110 | $13,475 |
In this example, a mortgage credit certificate could lower the amount owed in federal income taxes by $1,365. If you don’t have a mortgage yet, use this mortgage calculator to estimate your interest rate, loan amount, and, on the amortization chart, interest paid.
Mortgage Credit Certificate Pros and Cons
The mortgage credit certificate program was established by the Deficit Reduction Act of 1984 to make homeownership more affordable for low- and moderate-income first-time homebuyers. While an MCC tax credit can provide financial benefits, there are some potential drawbacks to consider, too.
Here’s a side-by-side comparison of MCC pros and cons to help you figure out if an MCC is right for you if you’re a first-time buyer.
| Pros | Cons |
|---|---|
| You can receive up to $2,000 in savings on taxes owed every year you’re paying mortgage interest, and carry over unused portions to following years. | A portion of MCC benefits may be subject to a recapture tax if you move before nine years, have a significant increase in income, or experience a gain from the home sale. |
| MCCs can reduce the cost of interest and decrease your debt-to-income ratio to help with mortgage preapproval and qualification. | If you have limited tax liability, a MCC tax credit may not pose much benefit since it’s nonrefundable. |
| MCCs are eligible with most fixed-rate mortgage options, including FHA, VA, USDA, and conventional loans. | Obtaining a MCC may come with processing fees, depending on the lender. |
| First-time homebuyer requirement is more flexible than other programs and can be waived for active military and veterans or if purchasing a home in targeted areas designated by federal and state government. | The mortgage tax credit cannot be applied to a secondary residence and might not be reissued when refinancing. |
How to Get a Mortgage Credit Certificate
Borrowers are issued an MCC through their lender before closing. Thus, it’s important to discuss options early in the process and when shopping for a mortgage.
Eligibility for an MCC varies by location. State housing finance agencies (HFAs) have established requirements for obtaining an MCC, if one is offered. These include limits on household income, loan amount, and home purchase price.
Other criteria to get an MCC include the following:
• HFA-approved lender: The HFA may require borrowing from an approved list of lenders.
• First-time homebuyer status: Borrowers must not have owned a principal resident in the past three years.
• Primary residence: Only owner-occupied homes are eligible for an MCC.
• Homebuyer education: HFAs may require borrowers to participate in education courses during the purchase process.
Claiming a Mortgage Credit Certificate on Your Taxes
To claim the MCC each year on your taxes, fill out IRS Form 8396. You’ll need to know the amount of interest you paid on the mortgage that year and the tax credit percentage set for the MCC.
Once complete, you’ll also know if any credit can be carried over for the following tax year.
The Takeaway
What is a MCC? A mortgage credit certificate is a federal income tax credit on a portion of the mortgage interest paid annually for low- to moderate-income first-time homebuyers or people purchasing a home in a targeted area.
The home buying process is a serious undertaking, especially for first-time homebuyers. To get up to speed, SoFi’s mortgage help center is a useful place to start and have your mortgage questions answered.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Who gives you the mortgage credit certificate?
A mortgage credit certificate program is administered by state-level housing finance agencies and issued by mortgage brokers or lenders.
Does everyone get a mortgage credit certificate?
No, mortgage credit certificates have borrower income limits and other eligibility requirements. For context, only 10,836 MCCs were issued in 2022, down from 22,298 issued in 2019, likely due to the fact that some states have discontinued their MCC program.
Can I refinance with a mortgage credit certificate?
A mortgage credit certificate does not prevent you from refinancing, but you’ll lose the MCC on your current loan. Many programs, though, allow borrowers to apply to receive a new MCC issued with their refinanced mortgage.
How do I know if I have an MCC?
Borrowers apply for an MCC prior to closing and receive a physical copy with a unique certificate number from their local or state government.
Do I lose my mortgage credit certificate if I refinance?
The original mortgage credit certificate becomes void if you refinance, but you may be able to have the MCC reissued if the principal balance on the refinanced loan is lower than the original.
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