By Tony Fernandez, Guild Mortgage loan program specialist
According to the old saying, there is no such thing as a free lunch.
The Mortgage Credit Certificate Program (MCC), though, is even better - for the right home buyer, it amounts to increased income because it reduces the amount of Federal income tax a homebuyer pays, thus giving more available income to qualify for a mortgage loan and to make monthly mortgage payments. Many first-time buyers and even mortgage industry professionals are unaware of the potential benefits of this program.
The MCC program is a federal tax credit created by Congress in 1984. The program is targeted at first-time home buyers in the low-and mid-income brackets. While the credit is offered by the federal government (click here for the IRS site), it must be administered at the city, county or state level, and not all jurisdictions have an MCC program in place.
The MCC allows qualified home buyers to reduce their federal income tax typically up to 20 percent of the mortgage interest they pay on their home on an annual basis. The MCC tax credit will vary considerably depending on the MCC program, state, county, or city and the amount of the homebuyer’s loan, their interest rate and the term of the loan. This credit may run for the life of the loan, meaning that qualified buyers can potentially save thousands of dollars through this program.
The great thing is that home owners can use the tax credit, and still take the standard mortgage interest deduction on the rest of the interest they pay on their home loans.
Assuming that many home owners pay about $10,000 in mortgage interest each year, the MCC can potentially save $2,000 annually, or nearly $166 per month, at least in the first years of their loan when the interest portion of their payment is largest. The above example is not an actual offer of credit and the actual amount of the MCC tax credit received will vary considerably depending on the MCC program, state, city, or county, and the amount of the homebuyer’s loan, their interest rate and the term of the loan.
These savings can be crucial to those whose income is not quite high enough to qualify for a home loan. By working with a tax professional, they can use the credit to decrease the federal tax withholding on their paycheck, thus increasing their income and crossing the necessary threshold for loan qualification.
Income requirements and program availability vary from state to state and from county to county. The best way to find out if the MCC is available in your area and if your income meets program guidelines is to contact a loan officer with your local Guild Mortgage office.
Guild Mortgage has been working with the MCC program for years and its loan officers are knowledgeable and experienced regarding the program’s rules.
The program does come with a few requirements: First, there is a cost for the MCC of $350 to $675, which is typically paid at loan closing. Also, the program only applies to owner-occupied homes, and applicants are generally required to take a home buyer education course. In some states, there may be restrictions on the type of house that can be purchased; for example, manufactured homes might not qualify.
In most cases, the MCC can be reissued within certain timeframes when a qualified home owner refinances his or her loan, as long as the borrower’s income still meets requirements.
If the home owner sells the home within the first nine years, the home owners should be aware of a potential recapture tax paid to the federal government on the borrower’s tax return in the year they sell. This is a rare occurrence, and would happen only if the home owner sells the home within the first nine years, at a substantial profit, and has also had a significant increase in income above the federal limits.
Your loan specialist can provide you with more detail and answer any questions you might have, including if the MCC program is available in your city, county or state and how to start the process for applying. It is strongly recommended you contact a tax professional before applying for an MCC in order to determine the potential benefits an MCC may provide you. The feasibility of the MCC Program and the degree to which it can provide housing assistance is totally dependent upon the extent to which homebuyers have federal tax liability which can be offset by the MCC tax credit.
Check out the Guild Mortgage website at http://prod.guildmortgage.com/guild-home/find-a-loan/products-services/Mortgage-Credit-Certificates, to find out more and the location of a Guild branch near you.
Guild Mortgage Company is an equal housing lender-NMLS ID 3274.