Mortgage Credit Certificates for Hawaii home buyers

The Mortgage Credit Certificate (MCC) program was initiated by the U.S. Tax Reform Act of 1984. The program was designed for low and moderate income earners to buy real estate - usually their first home purchase. In Hawaii, the Hawaii Housing Finance and Development Corp (HHFDC) issues Mortgage Credit Certificates.

What the Mortgage Credit Certificate does.

The MCC reduces your federal taxes, leaving more of your income available to qualify for a mortgage loan. Thus you can qualify to buy a larger home with the MCC, or you can stick to the less expensive properties and just enjoy the tax savings.

How the Mortgage Credit Certificate works

Generally, a home buyer deducts his/her mortgage interest on schedule "A" of the federal tax return. Itemized deductions reduce your taxes by your tax rate. For example, if your tax rate is 15%, a $1,000 mortgage interest deduction will save you $150 in taxes. The mortgage credit certificate is better - $1,000 of mortgage credit will save you $1,000 of taxes.

Note: the MCC is applicable to 20% of your mortgage interest, the remaining interest continues to be deductible on Schedule "A" of your tax return. Example: with $10,000 in total mortgage interest for the year, $2,000 is a direct tax credit and $8,000 is deducted on schedule "A". The $2,000 tax credit will save you $2,000 in taxes. The $8,000 schedule "A" deduction (assuming a 15% tax bracket) will save you ($8,000 times 15% equals)= $1,200. Combine the two and that's a $3,200 federal tax savings!

What's the catch?

There are several potential catches:

• The amount of your mortgage credit cannot exceed your federal tax liability. If you cannot use the full MCC in the current year, the unused credit can be carried forward for three years to offset future tax liabilities.
• Not all lenders offer the MCC. Banks with the MCC program include First Hawaiian Bank, Bank of Hawaii, American Savings Bank and Central Pacific Home Loans. HawaiiUSAFCU and Point Financial (a mortgage broker) also offer the MCC.
• The home you buy must be used as your principal residence when using the MCC. If you move to another home the MCC will be revoked and you can no longer claim the credit.You cannot have owned another principal residence at any time in the last three years prior to your home purchase using the MCC.
• If you sell your home within nine (9) years of purchase, you maybe subject to a recapture tax. If you're planning to sell in the near future this plan might not be best for you. There's a three-part test to determine whether an owner must pay the recapture tax. Check with your tax preparer to determine whether the tax will apply to you.

How do I apply for a Mortgage Credit Certificate?

Check with a lender who offers the MCC. Income limits as of 2007 are as follows:

Visit our website for more information about getting a mortgage loan from Hawaii banks and mortgage brokers.

Mike Bates is a realtor and Certified Public Accountant. He sells real estate throughout the islands with an emphasis on homes in Honolulu, Diamond Head and hawaii beachfront properties. Contact Mike for information about buying and selling homes as well as the Mortgage Credit Certificate.