If you are attempting to buy a home on a low or intermediate income, you need every bit of help that you can get. Mortgage credit certificates are one of the lesser-known ways that the federal government can help.
A mortgage credit certificate (MCC) is essentially a form of tax savings. The mortgage interest that you pay is already tax deductible if you itemize, but an MCC converts a portion of that mortgage interest (typically 20-25%) into a non-refundable tax credit that you can claim whether or not you itemize your tax deductions.
Tax credits are especially helpful to lower-income taxpayers because they reduce the actual tax you pay – not your taxable income. If you are in the 15% tax rate and receive a $100 tax deduction, your tax savings is $15 – but if you receive a $100 tax credit, your tax savings is the full $100 (assuming, for a non-refundable tax credit, that you owe at least $100 in taxes).
Lenders have the option to use the estimated tax credit in calculating the debt-to-income ratio during the loan qualification process. This has a double impact through lowering debt and raising income, since the MCC portion is effectively transformed from debt to income. For low-income buyers, this could provide a needed push over the loan qualification threshold. At the very least, it increases the purchasing power of a potential homeowner.
Your lender will submit your MCC application after the purchase contract has been signed, but before the closing procedure. Not all lenders participate in the MCC program, so you must find a participating lender. Check your state housing commission or similar organization to find a list of participating MCC lenders in your state.
To qualify for an MCC, you generally must meet these qualifications:
1. You must be a first-time homebuyer as defined by your state program (generally someone who has not owned a home within the past three years). Exceptions to the first-time rule may apply for certain groups (veterans, public servants, etc.) and for homes in certain geographic areas.
2. Household income must be within the limits for your state's program. Income limits may vary between different parts of the state.
3. The price of the home must be within the price limits of your state's program. Sales price limits may also vary by geographic area within your state.
4. The home must be the primary residence of the buyer and the buyer must intend to live in that home.
Some states may have variations on the theme, so verify the rules and restrictions with your state MCC program. Not every geographical area within a state is guaranteed to qualify for a MCC.
To take advantage of the credit, you will need to fill out IRS form 8396, "Mortgage Interest Credit" and file it with your annual tax submission.
What if you need the money during the year, instead of waiting to claim it as a tax credit? With an MCC, you have the option to reduce your withholding amount on your W-4 (and therefore increase your take-home pay) by the amount of the monthly credit. If you choose this path, keep in mind that the tax credit will change each year since it's based on the interest paid on the remaining principal balance, so you will need to adjust your W-4 each year.
If you plan to buy a home and are questioning your ability to afford one, why not see if there is an MCC program in your state? You may have an extra asset that you weren't even aware of – and that asset could be the difference between falling just short of home ownership and enjoying your brand-new home.
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