How a mortgage credit certificate (MCC) lowers the cost of borrowing

If you’re a first-time homebuyer or haven’t owned a home recently, you might be able to qualify for a mortgage credit certificate, also called a mortgage interest credit certificate or MCC.

A mortgage credit certificate could save you money when you file your taxes or 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 (MCC)?

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 50 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, though the exact qualifying income ranges vary by state.

How do mortgage credit certificates help homebuyers?

A mortgage credit certificate aims to make owning a home more affordable for low-income households. It allows them to take a nonrefundable federal tax credit equal to a particular percentage of the interest charged by their home loan annually — the general range is usually between 10 and 50 percent. The mortgage credit certificate reduces an eligible borrower’s federal income taxes, effectively enhancing their net income. 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).

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 or primary residence
• Participate in homeownership counseling or homebuyer education if required by your state’s MCC program
• Use the MCC with a purchase loan; refinanced loans are usually not eligible
• Pay fees charged by your housing finance agency and/or lender, if applicable (these sometimes can be rolled into the mortgage itself)

How to claim the mortgage credit certificate

The MCC tax credit can be taken at the time borrowers file their tax returns. To claim it, you’ll want to use IRS Form 8396 to document the MCC’s details and calculate your savings for the calendar year. Or, you can claim the benefit monthly, by amending your W-4 tax forms to lower the amount of federal income tax withheld from your paychecks.

It’s wise to consult with a tax professional to make sure you’re making the most of the benefits, and claiming them properly.

How much does the mortgage credit certificate cost?

Like everything else with buying a home, getting a mortgage credit certificate will cost you. Paradoxical as it sounds, you have to spend money to save money, at least at the start.

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.

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
• Whether you’re a first-time homebuyer

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

For example, in Louisiana, depending on where you intend to purchase, a family of two’s income cannot be higher than either $58,400 or $70,080 and the home being purchased must cost $312,368 or less in order to 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 $90,300 and $224,500.

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,” says Rosemarie Sabatino, senior homeownership policy specialist at the National Council of State Housing Agencies. “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. The application process is straightforward, as you supply income information and details about the home, such as the purchase price and location.

Keep in mind not all states have MCC programs, which is why it might benefit you to check out first-time homebuyer programs. You can also explore other local and federal programs that can lower your closing costs or offer help with your down payment.

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.

Pros and cons of a mortgage credit certificate

Mortgage interest credit certificates come with advantages and disadvantages.

Pros of a mortgage credit certificate

• It lowers your tax liability and can create more income.
• It makes it easier for low-income borrowers to buy a house.
• It's compatible with many loan types like conventional and government-backed mortgages.

Cons of a mortgage credit certificate

• The program comes with fees, which vary by state.
• If you refinance, your borrowed amount must be lower than that of the original loan to keep the credit.
• Credits can't be used with tax-exempt bond-financed mortgage programs.

Mortgage credit certificate FAQ

• Can I use a mortgage credit certificate for any type of loan?

  Yes, you can use a mortgage credit certificate with conventional and government-backed mortgages.
  

• Can I transfer my mortgage credit certificate to another property?

  No. Mortgage credit certificates are reserved for a first-time home purchase.
  

• Can I still qualify for a mortgage credit certificate if I have bad credit?

  Yes. A mortgage credit certificate isn’t a loan but a federal tax credit, so your credit score won’t matter.
  

• Can I sell my home if I have a mortgage credit certificate?

  You can sell your home, but beware of the recapture tax, which basically means you have to pay some of the credit back. It applies when all three of the following conditions apply:

  • You sell your home before owning it for nine years
  • You achieve a capital gain on the sale
  • Your income increased significantly since you bought your home

Additional reporting by Mia Taylor