What Is an MCC Loan? A Tax Credit for Homebuyers
Understand the financial advantages of a Mortgage Credit Certificate, a federal tax credit that reduces your tax burden and may increase your home purchasing power.
A Mortgage Credit Certificate (MCC) is a federal income tax credit that makes homeownership more affordable for lower-income individuals. It is not a loan and does not provide funds for a down payment. Instead, the MCC provides a dollar-for-dollar credit that directly reduces your annual federal tax liability, helping you save money over the life of your mortgage. This program is administered by state and local Housing Finance Agencies (HFAs).
How the Mortgage Credit Certificate Works
A Mortgage Credit Certificate converts a portion of your annual mortgage interest into a direct, dollar-for-dollar tax credit. The credit amount is calculated by multiplying the total mortgage interest you pay in a year by the credit rate on your certificate. This rate is set by the issuing HFA and ranges from 20% to 40%.
For example, if you pay $10,000 in mortgage interest with a 20% credit rate, you receive a $2,000 tax credit. The IRS caps the annual credit at $2,000 if the certificate’s rate is above 20%. Any mortgage interest not applied to the credit can still be claimed as a standard mortgage interest deduction on your tax return.
This tax savings can be a factor in mortgage qualification, as lenders may consider the increased disposable income when calculating your debt-to-income ratio. This can help some borrowers qualify for a larger loan. Homeowners can realize these savings annually when filing taxes or adjust their W-4 withholding with their employer to increase their take-home pay throughout the year.
Eligibility Requirements
Applicants must meet several criteria, including a first-time homebuyer requirement. This means the applicant has not owned a principal residence in the three years prior to the purchase. The rule is often waived for veterans or for those buying a home in a federally designated “targeted area,” which are economically distressed census tracts.
Applicants must also meet income and purchase price limits. A household’s total income cannot exceed the maximum for the area, which varies by county and household size. The home’s sale price must also fall below a set threshold for the region.
An MCC must be issued with a new mortgage for a home purchase and is not available for refinancing an existing loan, though some programs may allow for reissuance. The property must be the applicant’s principal residence. Prospective buyers can find specific income and purchase price limits for their location on their state or local HFA’s website.
The Application Process
You must obtain a Mortgage Credit Certificate in conjunction with your mortgage application and before you close on the home. The first step is to find a participating lender. Not all banks or mortgage companies offer MCCs, so you must work with one that is approved by your state or local HFA.
You will apply for the MCC through your approved lender as part of the overall loan package. The application requires documentation of your income and property details. The lender submits the application to the HFA on your behalf for approval.
An application for an MCC must be submitted and approved before your mortgage loan closes. You cannot apply for the certificate after you have already purchased the home. After the loan has closed, the HFA will issue the official Mortgage Credit Certificate, which you will need to file your taxes.
Claiming the Tax Credit and Post-Closing Considerations
After receiving your MCC, you must claim the credit each year on your federal tax return by completing and attaching IRS Form 8396, Mortgage Interest Credit, to your Form 1040. To complete the form, you will need your MCC, which provides the certificate number and credit rate, and Form 1098 from your lender, which shows the total interest paid.
On Form 8396, you will calculate your credit based on the certificate’s rate, subject to the $2,000 annual cap. The portion of your mortgage interest not used for the credit can still be claimed as an itemized deduction, but you must reduce your total mortgage interest deduction by the amount of the credit you claimed.
Homeowners should be aware of a potential recapture tax, which is a repayment of part of the credit. This tax can be triggered if you sell the home within the first nine years of ownership for a profit, and your income at the time of sale has significantly increased. All three conditions must be met for the tax to apply, and most homeowners do not have to pay it.