Buying your first home? Everything to know about mortgage credit certificates

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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, or MCC, which could save you money when you file your taxes and make it easier to pay your mortgage each month.

What is a mortgage credit certificate?

A mortgage credit certificate allows qualifying homeowners to claim a dollar-for-dollar tax credit for a portion of the interest paid on their mortgage each year, up to $2,000, according to the National Council of State Housing Agencies.

How do mortgage credit certificates help homebuyers?

Mortgage credit certificates aim to make owning a home a more affordable reality for lower-income households, with the biggest benefit arriving on Tax Day. (Typically, the IRS tax filing deadline is April 15.)

“The mortgage credit certificate reduces an eligible borrower’s federal income taxes and creates additional income for the borrower to use towards his or her monthly mortgage payment,” explains Taylore Maxey, press secretary at the Florida Housing Finance Corporation.

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.

Let’s say a borrower in Florida has a loan amount of $125,000 with a 5 percent interest rate. In the first year, he or she 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:

$6,250 x 30% = $1,875

More good news: The remaining $4,375 of interest can also be used as a tax deduction.

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.

Are there any risks?

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 says. “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 reimbursement program that fully reimburses anyone subject to paying the recapture tax.

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 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.”

How to get a mortgage credit certificate

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 can vary widely from both 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.

Sabatino adds that the application process varies by state, as well.

“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.”

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.

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 a mortgage credit certificate on your taxes

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.

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