Mortgage credit certificates (MCCs) are designed to help low income borrowers afford their homes. This is done by converting a portion of interest into a tax credit that is non-refundable. MCCs are issued by state and local Housing Finance Agency (HFA), and are considered a federal tax credit, not a mortgage program.
Although mortgage credit certificates are typically reserved for first time home buyers, they can be made available for those who have served or are currently serving in the military, or those who are purchasing a home in an area specified by the U.S. Department of Housing and Urban Development (HUD).
How do MCCs Work?
By reducing the amount of taxes owed on a home, mortgage credit certificates can help borrowers qualify for a mortgage. The portion of taxes that a borrower is qualified to receive may also be referred to as a mortgage credit certificate. This allows borrowers to receive a tax credit for a chunk of their loan’s interest. This is not to be confused with a tax deduction, as this is a dollar-for-dollar credit.
MCCs vary by state, but generally those who qualify can receive up to $2,000 annually in tax credits. This amount is calculated by the lender with consideration toward the total loan amount, interest rate, and the MCC percentage. Percentages typically range from 20 to 40 percent of the entire interest rate.
Borrowers can apply for an MCC through their lender during the period of time between signing a purchase agreement and officially closing.
Typically, MCCs can be paired with any for purchase mortgage program, and the home must be used as the borrower’s primary residence.
Mortgage credit certificates have strict income limitations, as MCCs are geared toward low-income borrowers. This can make qualification difficult. Additionally, the maximum income is the same for single occupancy as it is for a dual occupancy, meaning married couples can have a much harder time qualifying.
If a borrower meets all three of the following conditions, a portion of the mortgage credit certificate may be subject to recapture by the Internal Revenue Service (IRS):
- The borrower’s home is sold within the first nine years of purchase
- A financial gain is made through the sale of the borrower’s home
- The borrower’s income has increased significantly from the time the home was purchased
The greatest amount that can be recaptured is either 6.25% of the loan’s principal balance or 50% of the gain made from the sale of the home, which ever is lower. However, the HFA has concluded that few MCC recipients have been subject to recapture.