Mortgage Credit Certificates Explained:
Mortgage credit certificate is a document provided by the originating mortgage lender to the borrower that directly converts a portion of the mortgage interest paid by the borrower into a non-refundable tax credit. Mortgage credit certificates can be issued by either loan brokers or the lenders themselves, and are typically available only to low- or moderate-income buyers.
Mortgage Credit Certificate= entitles qualified home buyers to reduce the amount of their federal income tax liability by an amount equal to a portion of the interest paid during the year on a home mortgage. This tax credit allows the buyer to qualify more easily for a loan by increasing the effective income of the buyer. The Riverside County MCC Program provides for a twenty percent (20%) rate which can be applied to the interest paid on the mortgage loan. The borrower can claim a tax credit equal to 20% of the interest paid during the year. Since the borrowers taxes are being reduced by the amount of the credit, this increases the take-home pay by the amount of the credit. The buyer takes the remaining 80% interest as a deduction. When underwriting the loan, a lender takes this into consideration and the borrower is able to qualify for a larger loan than would otherwise be possible. The following table illustrates how a MCC increases a borrower’s "effective home buying power":
Information about Mortgage Credit Certificates:
Mortgage credit certificates are designed to help first-time homebuyers qualify for a home loan by reducing their tax liabilities below what they would otherwise have to pay.
The term “mortgage credit certificate” is sometimes also used to refer to the tax credit it allows eligible borrowers to receive. Borrowers can receive a dollar-for-dollar tax credit for a portion of the mortgage interest they pay each year. Borrowers can get a maximum tax credit of $2,000 each year. The exact amount of the tax credit a borrower will receive is calculated through a formula that takes into account the mortgage amount, the mortgage interest rate and the mortgage credit certificate percentage. The credit rate percentage depends on the amount of the original mortgage loan.
Procedures for Mortgage Credit Certificate:
Procedurally speaking, borrowers apply for mortgage credit certificates with the originating lender after the purchase contract has been signed, but before the time of closing. The party administering the program charges a non-refundable fee for this service. The state or local approval that is granted can be valid for up to 120 days and is usually transferable to another property if the current loan does not close.
The program has income and purchase price criteria that homebuyers must meet to qualify. Borrowers who are not first-time homebuyers may still be able to qualify for a mortgage credit certificate if they purchase a property in an area that has designated as economically distressed.
By reducing the buyer’s federal tax liability, the mortgage credit certificate and the tax break it enables can in essence help subsidize or offset a portion of the monthly mortgage payment. This reduced tax liability may even help borrowers qualify for a loan during the initial approval process.
Once they obtain a mortgage credit certificate, the borrower can continue to use it to take advantage of the tax credit every year for as long as they keep paying interest on the loan while remaining in the home and occupying it as their principal residence. If the borrower refinances the loan, the mortgage credit certificate can usually be reissued in most cases.
What happens if the homebuyer cannot use the entire amount of the MCC credit for the year in which it applies?
If the amount of the MCC exceeds the homebuyer’s tax liability, the unused portion of the credit can be carried forward to the next three years or until used, whichever comes first.
Qualifying for the MCC Program
3 basic qualifications:
(1) The home being purchased must fall within the program purchase price limits. If the home is located in a Target Area, then the first-time buyer limitation does not apply and the income and cost limits are higher.
(2) The borrower must be a first time Home Buyer; and
(3) The borrowers annual income must fall within the program income limits;
Procedures for how MCC works:
Assume the homebuyer bought a home with a mortgage amount of $300,000 with an interest rate of 5% with the monthly mortgage payment of $1,610 as illustrated in the previous page.
1. Because the homebuyer has a Mortgage Credit Certificate, the homebuyer could receive a federal income tax credit of $3,000 (20% x $15,000). If the homebuyer income tax liability is $3,000 or greater, the homebuyer will receive the full benefit of the MCC tax credit. If the amount of homebuyer tax credit exceeds the amount of his/her tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability.
2. By applying the increase in the homebuyer take home pay of $250 towards his monthly mortgage payment of $1,610, his effective monthly payment becomes $1,360 ($1,610 minus $250).
3. The homebuyer would pay a total of $300,000 x 0.05= $15,000 of interest in the first year (Loan amount x interest rate).
4. The remaining 80% of the mortgage interest or $12,000 ($15,000 less $3,000) qualifies as an itemized income tax deduction.
5. To receive immediate benefit of the MCC tax credit, the homebuyer would file a revised W-4 withholding from with the homebuyer’s employer to reduce the amount of federal income tax withheld from his/her wages and increase homebuyer’s take home pay by $250 per month ($3,000/12 )
How to apply for a Fee to receive a MCC
The maximum total fee for a MCC is $400. Of this, the County collects a $300 Non-Refundable application fee which may be paid by any person (buyer, seller, lender, etc.). In addition, Participating Lenders may charge up to $100 for their processing of the MCC. Therefore, the total maximum charge in association with the MCC is $400. This is separate from the other fees associated with purchasing a home, such as escrow fees, loan origination and processing fees and closing costs. Your lender can provide you with a breakdown of the total fees associated with obtaining a mortgage loan.
Tax Deduction vs. Tax Credit
A “tax credit” entitles a tax payer to subtract the amount of credit from their total federal tax bill whereas a “tax deduction” is subtracted from adjusted gross income before federal income taxes are computed.
Time Period of the Mortgage Credit Certificate
The MCC is in effect for the life of the loan as long as the home remains the borrower’s principal residence. The MCC is not transferable to a new loan when refinancing, nor can it be assigned or transferred to a new buyer or another home. In addition, the MCC Program includes a nine year recapture provision which provides for a return of tax credits taken if the property ceases to be the borrower’s primary residence within nine years from the close of escrow. The amount of tax recapture is determined by formula, and provided to the borrower at the time the application is taken. After expiration of the nine year period, the borrower may dispense of the property without incurring penalty, but would lose the future benefits of the MCC.
The residence purchased in conjunction with a MCC must be the borrower’s principal residence and may not be used as a business or vacation home. The home may be a detached or attached single family home, condominium unit, a co-op unit, or a manufactured home on permanent foundation (new or re-sale).
Terms of the Loan
The loan terms depend on the Lender and type of loan you use. Depending on the mortgage marketplace and the borrower requirements, each Lender can set its own interest rate, length of mortgage term, down payment requirement, fees, points, closing costs and other loan terms. MCC's may be used with conventional, fixed, 30-year term loan, including FHA, VA, FNMA, FHLMC and privately insured loans. MCC's may not be used in conjunction with bond backed loans, such as Cal-Vet or California Housing Financing Agency (CalHFA) loans.
In order to issue MCC's, the County must apply to the California Debt Limit Allocation Committee for an MCC Allocation. The amount that the County received is based on a combination of factors including demonstrated need, past performance and available MCC authority.
How to Apply for a Mortgage Credit Certificate
Borrowers must apply for a MCC through a Participating Lender. The Participating Lender will perform an initial qualification and assist the borrower in completing the MCC submission forms. The Lender then submits the MCC application to the County. The County reviews the Borrowers qualifications and, if they meet the program guidelines, issues a letter of commitment to the Lender. The Commitment Letter must be issued prior to the close of the loan. The loan must close within 60 days of the commitment. Upon loan closing, the Lender submits the MCC Closing package to the County and the County issues the MCC, with the Lender and borrower each receiving a copy. The borrower may then claim the tax credit on their Federal Income Tax Returns. The borrower can receive the money annually as a tax refund or adjust his or her W-4 withholding form to receive the benefit via an increased pay check.
Definition of a 1st-time Home Buyer
A first time Home Buyer is defined as a person who has not had an ownership interest in improved-upon residential real property for the previous three (3) years.
Qualified Mortgage Credit Certificate is available in the following areas/cities
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