What is a Mortgage Credit Certificate and How Does it Benefit First Time Homebuyers in Florida?
A mortgage credit certificate (MCC) is a tool that can help you get your first home. It's not a loan, but it does reduce the amount of money you have to pay for your mortgage. If you use an MCC, the government will cover some of your monthly interest payments during the first five years after purchasing your home.
What is a mortgage credit certificate, and how does it work?
A mortgage credit certificate is a tax credit given by the IRS to low-income buyers.
It allows a homebuyer to claim a tax credit for some portion of the mortgage interest paid during the year, which reduces the amount of federal income tax you owe, thus saving you money.
The U.S. Congress created the MCC in 1984 as part of the Tax Reform Act.
The program was designed to help first-time homebuyers and others who couldn't afford to make a down payment on their homes by providing them with government-guaranteed loans to cover the difference between their income and the cost of their new home.
The MCC helped spur home sales during the 1980s housing crisis when homeownership rates fell among low- and moderate-income borrowers. Its popularity led Congress to increase funding for it several times.
According to a report from the National Housing Institute (NHI), by 1991, more than 40% of all first-time homebuyer loans were backed by an MCC.
The MCC Program was created to make homeownership affordable
The Mortgage Credit Certificate (MCC) helps make homeownership more affordable for low-income individuals and families.
It is a federal tax credit, not an actual loan, and it works by lowering the amount of federal income tax you pay.
The MCC Program offers homebuyers a dollar-for-dollar tax credit that reduces their federal income taxes by up to $2000 per year—which can apply toward principal, interest, or taxes on their home mortgage payments.
The MCC is available only through participating lenders who offer this program in conjunction with FHA loans.
Numerous stakeholders run the program
Contact your local government to see if they have an MCC program.
Contact them if they don't, but your city or county does! The program is administered by local governments, lending institutions, and nonprofit organizations.
Contact your local HUD-approved housing counseling agency to learn more about the MCC program.
You can use a Mortgage Credit Certificate with an FHA, VA, or USDA home loan
A Mortgage Credit Certificate (MCC) is a tax credit usable with any FHA, VA, or USDA home loan.
It's usually issued in the form of a concrete benefit to help low-income borrowers afford their mortgage payments over time.
An MCC is not available for conventional mortgages, so you won't be able to use one with your first home purchase if you go through a private lender like Wells Fargo or Bank of America.
But don't worry! There are many other ways for first-time buyers to save money on their mortgage payments and get into their dream homes.
A homebuyer who receives an MCC will receive an IRS Form 8396 each year. This form must be attached to their tax return.
An MCC may benefit you if you're a first-time homebuyer who:
Is looking to buy a home and receive tax benefits for buying a home (mortgage interest deduction)
Does not have enough cash to make the down payment on your home
- Is interested in getting an FHA loan because they have low requirements for down payments and credit scores
A mortgage Credit Certificate can help reduce monthly mortgage interest expenses
As a federal tax credit for low-income first-time homebuyers, the Mortgage Credit Certificate can reduce some of their monthly mortgage interest expenses.
The Certificate assists these first-time homebuyers by reducing some of their expenses, thus increasing their disposable income and purchasing power.
This additional income may also help them pay down other debts, such as credit card bills or car loans.
There are income limits and purchase price limits that apply to the MCC
MCC income limits depend on household income, and purchase price limits vary from location to location. Income limits may be higher in high-cost areas.
The MCC requires that households have an annual gross income less than or equal to the table amount for their area as determined by HUD. The table amounts can vary depending on the size of your family and where you live.
For example, if you were buying a home in Boston with two people who make $40,000 a year (which is 120% of median income), then your combined family income would be $80,000 per year: 120% of $66,150 = 80k/2 = 40k + 40k = 80 k/2 = 40k + 40k = 80k per year.
This means that this home would qualify for an MCC because it was under 110 percent of median income ($70k) while within reasonable commuting distance from Boston (30 miles).
A Mortgage Credit Certificate helps buyers save money on their monthly mortgage payments
One of the most significant benefits of a Mortgage Credit Certificate (MCC) is that it reduces the amount of federal income tax you owe, thus increasing your take-home pay.
That means you'll have more money in your pocket at the end of each month to spend on other things or reduce your mortgage loan.
You may also be able to use the savings from an MCC to pay other bills or make other investments.
For example, if your monthly mortgage payment goes down by $100 per month due to an MCC, this could mean an extra $1250 for you over 30 years!
Eligibility requirements for a mortgage credit certificate
If you're a first-time homebuyer, you may be eligible for a mortgage credit certificate. To be eligible:
You must meet the income limits for your area. Check with your lender or HUD to find out what they are.
You must meet purchase price limits for your area. Check with your lender or HUD to determine what they are and how much money you'll need to qualify for a mortgage credit certificate.
- You must apply through an approved lender, who can tell you if you're eligible for one of these programs.
Benefits of mortgage credit certificate to first time home buyers
Mortgage Credit Certificates (MCCs) are an excellent way for first-time homebuyers to save on their mortgage interest payments.
An MCC provides a tax credit available every year they occupy a home as their primary residence. The amount of the credit is based on a fixed percentage of your mortgage interest paid.
An MCC does not provide any cash for the buyer but reduces their tax liability each year, allowing them to retain more money in their pocket over time.
The amount of the credit is based on a fixed percentage of your mortgage interest paid each year.
For example, if you have an MCC with an interest rate cap of 6%, the maximum annual amount credited to your taxes would be $3,000 per year ($1,500 in the case of married filing separately).
When you buy a home with a mortgage credit certificate, the money you receive from the government can help to increase your purchasing power and reduce your monthly mortgage payment.
A mortgage credit certificate reduces the interest you have to pay on your mortgage. Your monthly payments will be lower, and less of your income will pay off your home loan.
You do not need to repay a mortgage credit certificate because the government has already issued it.
However, if you sell or refinance your home in the future, you may need to include it as part of your taxable income and pay taxes on any amount received from the government as part of this tax benefit.
When to apply for a mortgage credit certificate
If you're a first-time home buyer, the MCC is great because it allows you to buy a home with only 3% down.
If you have an FHA loan and make at least a 5% down payment on your house, then that's all you need for an MCC.
You can apply for an MCC any time during the year, but it's best to do so as soon as possible after taking out your loan (if buying) or finding a property that fits within those guidelines (if renting).
If you're not buying your first home and already have one, the MCC program won't help. It still might be worth getting if interest rates drop and your income rises significantly over time.
How to apply for a mortgage credit certificate
The following steps will help you apply for a Mortgage Credit Certificate (MCC).
Contact a participating lender and complete an application for a mortgage loan. MCCs are available only through participating lenders who access the FHA's Centralized Eligibility Repository (CER).
The CER contains information on all mortgages insured by HUD-FHA that have been closed since January 2006.
The CER includes information on over 8 million insured mortgages currently active in the marketplace, including FHA-insured mortgages and VA-guaranteed mortgages.
Lenders must use this database to determine whether they qualify for an MCC.
Once your application, the lender will obtain a credit report to determine your eligibility for an MCC. You are not already subject to a Fannie Mae or Freddie Mac risk-based pricing test or similar underwriting requirement.
You can obtain your credit report from any source that previously provided you with this information, such as a consumer reporting agency (CRA) or financial institution.
Suppose you are already subject to a Fannie Mae or Freddie Mac risk-based pricing test or similar underwriting requirement and have been pre-approved based on that test. In that case, the lender should use that result as proof of eligibility for an MCC (see Step 3b).
If approved by your lender based on their review of your credit report, they will provide you with an MCC letter authorizing them to apply all or part of your funds toward closing costs.
You must present this letter when closing on your purchase or refinance transaction for us to approve payment of closing costs from the MCC program funds provided by HUD-FHA.
The Certificate is presented with your offer on a home, receiving the benefit of the reduced tax obligation from the State and federal tax saved annually.
If you are approved for an MCC and choose not to use it at closing, you may be eligible for a refund after closing.
When you close your loan, the State will mail you a Mortgage Credit Certificate (MCC) that includes an authorization number that identifies your specific mortgage loan.
An MCC lender may require an MCC-eligible borrower to apply for a mortgage loan using the Model Form 1003, Home Mortgage Disclosure Act (HMDA) Application, or its equivalent.
The lender must obtain the information necessary to determine if the applicant is eligible for an MCC before submitting any HMDA data to Fannie Mae or Freddie Mac.
How to claim your mortgage credit certificate tax credit
To claim the credit, you must attach Form 8396 to your return. The amount of credit you can claim will depend on the interest paid on your mortgage.
To figure out how much of a credit you are eligible for, add up all of the interest payments made by all borrowers during the year and divide that number into $2,000 (the maximum allowable tax credit).
For example - if there were three borrowers who each made monthly payments totaling $3,000 in 2016, then their total payment would be ($3,000 ÷ 3) = $1,000, which is below the maximum amount allowed so this borrower would not receive any tax benefits from claiming their mortgage certificate.
However, if one borrower had made monthly payments totaling $4,500, then ($4,500 ÷ 1) = 4500, resulting in a tax credit of 3000 (4500 - 1500).
In this case, only one borrower would receive any benefit from claiming their mortgage certificate. However, since two other borrowers were involved as well, they could still benefit from doing so even though someone else received most of it."
Mortgage credit certificate amount of tax credit to expect
The tax credit is 20% of the annual interest paid on the mortgage loan. To qualify for the tax credit, you must be a first-time homebuyer and meet income limits for your State and county.
The maximum credit is $2000 per year if the certificate credit rate is over 0%. To determine how much you can expect from your Certificate, you will need to know:
- Current Certificate Rate/CRC Rate.
- Your Total Annual Household Income (including spouse's income).
- Current Mortgage Interest Rate.
What happens if my mortgage credit certificate expires?
In general, most MCCs expire in 15 years from when they were issued or when construction on your new home begins (whichever is later).
After this time expires, any remaining funds become yours to keep and use however you please – this means that if there isn't any money left on your mortgage credit certificate, it won't matter because you would have paid off by then. All loans anyway!
Is an MCC worth it?
The answer to that question depends on your situation, but generally speaking, yes. A Mortgage Credit Certificate can save you a significant amount of money. However, it isn't for everyone.
Before you apply for one of these tax incentives, it's essential to evaluate the pros and cons of a Mortgage Credit Certificate so that you can decide if it's right for you:
Pros of MCC
The MCC is available to qualified homebuyers who want to purchase their first home or refinance their current mortgage into an FHA loan and will save them thousands in taxes over the life of the mortgage.
In addition, this federal tax incentive may be able to boost your credit score if lenders view it as an indication that you are financially responsible enough to take out debt responsibly.
Cons of MCC
There are some drawbacks associated with using an MCC, especially if it has expired or been discontinued by Congress (which they often are). These include:
paying more interest than initially estimated due to delayed approval from lenders;
being ineligible for other programs such as VA loans;
needing additional funds upfront since most lenders require payment when applying;
not being able to use all available credit lines due to expected income reduction when receiving funds from HUD-approved agencies like NeighborWorks America or Habitat for Humanity International;
- having trouble renting out property due.
If you're a first-time home buyer looking for an additional tax credit and a way to reduce your monthly mortgage payments, the MCC is worth it.
Just keep in mind that with the MCC, there are certain restrictions on what types of houses can be purchased (i.e., they must be owner-occupied).
If you meet these requirements and have been approved for a mortgage in the past two years without any denials or defaults on other credit accounts, applying for an MCC shouldn't be too difficult.
The process takes some time but should not exceed three months from start to finish once everything has been completed correctly.
With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.
About Author - Phil Ganz
Phil Ganz has over 20+ years of experience in the residential financing space. With over a billion dollars of funded loans, Phil helps homebuyers configure the perfect mortgage plan. Whether it's your first home, a complex multiple-property purchase, or anything in between, Phil has the experience to help you achieve your goals.