MCP Help Blog

If you have never heard of the Mortgage Credit Certificate (MCC) programs, you’re not alone. Most loan officers haven’t either. Yet this deal has been made available to qualifying home buyers since the Tax Reform Act of 1984! Not only does this program put money in your pocket for the entire life of your loan, it makes qualifying for your home purchase easier. Here’s how.

Most people know that mortgage interest is tax deductible. Which is great if you make a lot of money and have a high mortgage payment. If you take the standard deduction, though, paying mortgage interest instead of rent doesn’t do you any good tax-wise. Enter the Mortgage Credit Certificate. These are issued by state and local governments, and you are required to get your mortgage loan through lenders that participate in the program. You have to meet certain guidelines to be eligible — it’s for people who haven’t owned a home in at least three years, there are income limitations, and there is a maximum amount you can spend on your home.

With an MCC, the IRS allows you to not only deduct your mortgage interest, it gives you a credit of up to 20% of your mortgage interest against your tax liabilities. And the lender will deduct that credit from your house payment when calculating your debt to income ratios, qualifying you for a larger loan than you otherwise could. Here’s an example:

• You get a mortgage of $250,000 at 6.00% for 30 years with monthly principal and interest payments of $1,499 and an MCC credit rate of 20%.
• In the first year, you pay a total of $14,916 of interest on your mortgage loan. Because you have an MCC, you could receive a federal income tax credit of $2,983 (20% of $14,916). If your income tax liability is $2,983 or greater, your will receive the full benefit of the MCC tax credit. If the amount of your tax credit exceeds the amount of your tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability.
• The remaining 80% of mortgage interest, or $11,933, qualifies as an itemized income tax deduction.
• To receive the immediate benefit of your MCC tax credit, you would file a revised W-4 withholding form with your employer to reduce the amount of federal income tax withheld from your wages and increase your take home pay by $249 per month ($2,983 divided by 12).
• By applying the increase in your take home pay of $249 towards your monthly mortgage payment of $1,499, your effective monthly payment would be $1,250, ($1,499 minus $249).
• This means that instead of needing an annual income of $64,243 to qualify for your mortgage (assuming a 28% housing expense to gross income ratio), you only have to earn $53,571.

So when shopping for your mortgage, check with your state to see if you qualify for an MCC. Make sure you tell your lender that you have an MCC, and make sure it participates in the program before starting your loan application.