Buying your first home comes with costs and possibly stress, but there’s at least one potential silver lining. If you’re within income limits, you might be able to qualify for a mortgage credit certificate, also called a mortgage interest credit certificate or MCC.

What is a mortgage credit certificate? It could save you money when you file your taxes and make it easier to pay your mortgage each month. Learn more about this mortgage certificate, who is eligible, how to apply, how to claim the tax credit and  what happens if you refinance.

What is a mortgage credit certificate?

A mortgage credit certificate allows qualifying homeowners to claim a refund for a portion of the interest paid on their mortgage each year, up to $2,000. A state or local housing finance agency administers the MCC program (not all states have them).

An MCC is not a tax deduction. Instead, it offers a dollar-for-dollar tax credit to eligible homeowners, applied against their federal income tax. Each state sets a limit on the percentage of the total mortgage interest that can go toward the $2,000 credit: In Florida, for example, the credit is limited to 30 percent of the interest paid.

Mortgage credit certificates are issued directly to eligible homebuyers by their lender. They’re geared to low- and middle-income taxpayers, with gross incomes of $60,000 to $90,000 per household, though the exact figures vary by state. In McKinney, Texas, for example, the limit is $70,400 for a one- or two-person household, and $80,960 for homes with three or more occupants.

How do mortgage credit certificates help homebuyers?

A mortgage credit certificate aims to make owning a home a more affordable reality for lower-income households. It allows them to take a nonrefundable federal tax credit equal to a particular percentage of the interest paid on their loan annually — the general range is usually between 10 and 50 percent.   These tax credits can be taken at the time borrowers file their tax returns, or they can amend their W-4 tax withholding forms to lower the amount of federal income tax withheld from their paychecks so that they can claim the benefit monthly.

The mortgage credit certificate reduces an eligible borrower’s federal income taxes and creates additional income for the borrower. MCCs can aid mortgage borrowers who might not otherwise qualify for a loan by decreasing their net monthly mortgage payment or effectively boosting their earnings (the lender can consider the MCC as income).

Mortgage credit certificate example

Let’s say a borrower in Florida has a loan amount of $125,000 with a 5 percent fixed interest rate. In the first year, they would pay approximately $6,250 in interest charges, and with a mortgage credit certificate, could claim a credit of up to $1,875 at tax time:

Mortgage Calculator
$6,250 x 30% = $1,875
Mortgage $125,000
Interest rate 5.0%
Annual mortgage interest $6,250
MCC percentage 30%
MCC credit $1,875

Keep in mind that this formula looks a bit different in different locations. Michigan, for example, has a 20 percent mortgage credit certificate limit, while Virginia’s is 10 percent.

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After taking the MCC, any remaining interest costs ($4,375 in the above example) can be deducted from your taxable income, if you itemize deductions on your tax return.

Are there any risks to the MCC?

Saving on your annual tax bill is worth celebrating, but getting a mortgage credit certificate can come with one potential downside. In rare cases, you might have to pay back the money you saved from the credit.

“If you sell your home within the first nine years, you may, under limited circumstances, have to pay what’s called a recapture tax to the federal government to cover some of the benefit you receive,” says Rosemarie Sabatino, senior homeownership policy specialist at the National Council of State Housing Agencies.

“Specifically, the tax applies if you sell the home within nine years if your income during that time increased significantly and if you realize a gain on the sale,” Sabatino adds. “How much of a tax you pay depends on how many years you’ve owned the home before the sale.”

Depending on where you live, though, you might be able to avoid the recapture tax. For example, the Michigan State Housing Development Authority offers a program that fully reimburses anyone subject to it.

You have to meet all three qualifications (income rise, selling home and realizing a profit) to be subject to recapture On the flip side, there is another risk: The credit might not add up to much if your income declines to such a low level that you don’t owe taxes to the IRS.

“It is important to note that borrowers can only claim the benefit from an MCC when they have a federal tax liability,” says Sabatino. “If a borrower experiences a loss of income and has no or little federal tax liability, then they receive no benefit from an MCC for that year. This is something to keep in mind if you expect your income to vary over the years.”

Who is eligible for a mortgage credit certificate?

To qualify for an MCC, you have to meet certain borrower criteria:

  • Be within income and sales price limits set by your state.
  • Be a first-time homebuyer, defined as someone who hasn’t had an ownership interest in a principal residence in three years (this requirement is waived if you are an active military service member or veteran or purchase in certain areas designated by the U.S. Department of Housing and Urban Development).
  • Use the home as your principal/primary residence.
  • Participate in homeownership counseling/homebuyer education if required by your state’s MCC program.
  • Use the MCC with a fixed-rate purchase loan; refinance loans are usually not eligible (more on this later).
  • Pay fees charged by your housing finance agency and/or lender, if applicable (these sometimes can be rolled into the mortgage itself).

How to get a mortgage credit certificate

You may be wondering: How do I know if I have a mortgage credit certificate I’m eligible for? Whether you qualify for a mortgage credit certificate depends on a few key factors:

  • Where you live
  • How much you make
  • The cost of the property
  • The size of your household

These figures can vary widely from state to state and county to county.

For example, if you make less than $78,700 and buy a home for less than $317,647 in Miami-Dade County in Florida, you could qualify for a mortgage credit certificate. Head up to Michigan, and you might qualify for an MCC if the property costs less than $224,500 and your income is somewhere between $71,600 and $144,060.

To determine whether you qualify for a mortgage credit certificate, check your state housing finance authority’s website to learn specific requirements. You’ll also want to browse the list of lenders that are approved to issue mortgage credit certificates.

How to apply for a mortgage credit certificate

The MCC application process varies by state.

“Generally, a homebuyer applies for a mortgage credit certificate through their lender,” Sabatino says. “It is often the lender that makes borrowers aware of the MCC program and its potential benefits. If a homebuyer is also applying for a housing finance agency program mortgage, the MCC and loan applications are generally submitted at the same time.”

For more information on how to apply for a mortgage credit certificate, contact your state’s housing finance agency (HFA) — there’s a handy list of them here.

Costs to keep in mind

Like everything else with buying a home, getting a mortgage credit certificate will cost you. The price tag varies based on your location and lender. In Michigan, for example, an MCC will run you $400, and a lender may tack on another $100 administration fee. In Texas, an MCC comes with a $500 issuance fee and a $200 compliance review fee.

While those additional fees might be frustrating, remember that you could wind up using the mortgage credit certificate for 30 years, so the annual savings might greatly exceed the one-time costs. Some municipalities or lenders allow you to roll the fees into your mortgage itself.

What happens if you refinance?

If you decide to refinance your mortgage, there’s a chance you could encounter some hiccups with continuing to use your mortgage credit certificate. In most cases, according to Sabatino, homeowners can have their certificates reissued as long as the refinanced loan has a lower principal balance than the original loan, but this can vary based on where you live. In Virginia, for instance, the certificate will not be reissued when refinancing.

How to claim the mortgage credit certificate

To claim the MCC tax credit, you’ll want to use IRS Form 8396 when you file your federal taxes to document the MCC’s details and calculate your savings for the calendar year. It’s wise to consult with a tax professional to make sure you’re making the most of the benefits of the mortgage credit certificate.

Bottom line on mortgage credit certificates

The mortgage credit certificate can be a valuable tool for eligible homebuyers – a resource that can provide a substantial tax deduction, even if you claim the standard deduction instead of itemizing your taxes.

Work closely with your lender and a trusted tax professional to ensure you are properly taking advantage of this benefit and maximizing your tax deductibility.