What Is a Mortgage Credit Certificate in NC and How Does It Work?

For first-time homebuyers in North Carolina, affording a mortgage can be challenging. To ease this financial burden, the state offers a Mortgage Credit Certificate (MCC), which provides a tax credit that reduces federal income tax liability and makes homeownership more affordable.

This program has specific eligibility criteria and requires an application process. Understanding how it works, how to claim the benefit on taxes, and what happens if you refinance is essential for maximizing its advantages.

Basic Eligibility Criteria

Not everyone qualifies for a Mortgage Credit Certificate in North Carolina. Eligibility is based on income limits, property usage, and loan type restrictions.

Income Thresholds

Income limits ensure the program benefits those who need financial assistance. These limits vary by county and household size. Higher-cost areas allow for higher thresholds, while rural counties have lower caps. Larger households also qualify for higher income limits.

The North Carolina Housing Finance Agency (NCHFA) updates these figures periodically, so applicants should check the latest numbers before applying. Only the income of individuals listed on the mortgage application is considered, meaning other household members’ earnings typically do not affect eligibility.

Owner-Occupancy Requirement

The home must be the buyer’s primary residence. Investment properties and second homes do not qualify. Buyers must move in within 60 days of closing and continue living there to maintain eligibility.

Renting out the home or using it as a vacation property can revoke the tax benefit, potentially requiring repayment of past credits. Selling within nine years may trigger a federal recapture tax, depending on income growth and profit from the sale.

Loan Type Requirements

Eligible mortgage types include conventional, FHA, VA, and USDA loans. Adjustable-rate mortgages (ARMs) may have additional restrictions. The loan must be for purchasing a home—refinancing does not qualify for a new MCC.

However, homeowners refinancing a mortgage that already had an MCC may be able to reissue the certificate under specific conditions. Borrowers should confirm with their lender whether their loan type qualifies before applying.

Application Steps

To obtain an MCC, buyers must work with a lender approved by the North Carolina Housing Finance Agency. Not all lenders participate, so confirming eligibility with the lender is necessary.

The MCC application is completed alongside the mortgage application. The lender guides applicants through the process, ensuring all required forms are submitted before closing. Since the certificate must be issued at the time of purchase, applying early is essential. A non-refundable application fee is required, which varies by lender.

Once submitted, the lender forwards the application to the NCHFA for review. The agency verifies income limits and property eligibility. This process can take several weeks, so buyers should plan accordingly. If approved, the certificate is issued at closing, allowing homeowners to claim the tax credit in the following tax year.

Certificate Rate and Tax Calculation

The tax credit amount depends on the certificate rate set by the NCHFA. As of 2024, this rate typically falls between 20% and 30% of the mortgage interest paid annually. For example, if a homeowner pays $8,000 in mortgage interest and has a 30% rate, they can claim a $2,400 credit.

The maximum credit allowed per year is $2,000 unless the rate is below 20%, in which case the full calculated amount may be used. Any mortgage interest not covered by the credit can still be deducted as an itemized deduction.

Unlike a deduction, which reduces taxable income, an MCC credit directly lowers the tax bill dollar for dollar. The credit applies for the life of the mortgage, provided the homeowner continues to meet program requirements.

Including It in Annual Tax Returns

To claim the MCC tax benefit, homeowners must file IRS Form 8396, Mortgage Interest Credit, with their federal tax return. This form calculates the allowable credit and ensures it does not exceed the total tax liability.

The credit is non-refundable, meaning it can reduce taxes owed to zero but does not generate a refund if it exceeds the tax due. Any unused portion can be carried forward for up to three years.

Homeowners must retain their annual mortgage interest statement (Form 1098) from their lender, which reports the total interest paid. Changes in loan terms, such as modifications, should be reviewed for potential impact on eligibility. Taxpayers using professional preparers should provide a copy of the original MCC to ensure accurate filing.

Treatment During Mortgage Refinancing

Refinancing a mortgage with an MCC requires specific steps to retain the tax benefit. Since MCCs are tied to the original loan, they do not automatically transfer to a new mortgage. However, the NCHFA allows eligible homeowners to apply for a reissued MCC (RMCC).

To qualify for an RMCC, the refinanced loan amount cannot exceed the remaining principal balance of the original mortgage. Cash-out refinancing disqualifies the homeowner from receiving a reissued certificate. The homeowner must apply for the RMCC within a set timeframe after refinancing, usually within a few months of closing.

Lenders handling the refinance may not automatically inform borrowers about the RMCC option, so homeowners should ask about eligibility. If approved, the homeowner can continue claiming the tax credit. Failure to apply for an RMCC means the tax benefit is permanently lost.

Recordkeeping Essentials

Maintaining thorough records ensures continued eligibility for the MCC tax credit and prevents issues during tax filing. Homeowners should keep a copy of the original certificate and any reissued MCCs if refinancing occurs.

Annual mortgage interest statements (Form 1098) should be retained alongside tax returns for at least three years, aligning with the IRS audit window. If the home is sold within nine years, homeowners should review potential recapture tax obligations and keep documentation of income levels and sale proceeds.