Mortgage Credit Certificate Explained
Working with Washington state home buyers for years, I have noticed the Mortgage Credit Certificate is a sometimes overlooked form of home buyer assistance that can be used in addition to Washington State Housing Finance Commission (WSHFC) mortgages. Programs like WSHFC Home Advantage, tha provide down payment assistance to eligible borrowers. The MCC is a federal tax credit program for eligible home buyers that helps increase your home purchasing power. The credit provides you with a 20% tax credit on the interest portion of your mortgage payment. Buyers should contact the IRS or a tax professional for more information when considering the applying for the MCC and can speak to thier HR Payroll department to potentially have this amount reduced from your monthly withholdings on your paycheck.
The tax credit increases a buyer's take-home income, and subsequently the home loan amount for which you qualify. The tax credit is applied your federal tax liability whereas a tax deduction reduces your taxable income. Any unused portion of the MCC credit can be accumulated for three years.
The MCC Calculation
The dollar amount of the credit is calculated using the following equation and the example with a 5% mortgage interest rate.
Loan Amount X Interest Rate x 0.20 ÷ 12 = Monthly Credit Amount
$200,000 X .05 x 0.20 ÷ 12 = $167
This monthly credit amount is applied to a buyer's debt-to-income ratio (DTI) that is used to calculate a maximum possible mortgage payment. With an FHA mortgage, this amount is applied as a reduction in your monthly debt payments. With a conventional loan, the amount is applied to your gross monthly income, and has a marginally less significant impact on reducing your qualifying DTI ratio.
Qualifying and Registering
You must meet the following qualifying requirements to qualify this program:
• Be a first time home buyer (or have not owned a home in the past 3 years)*
• Purchase an owner-occupied, primary residence
• Meet income limits
• Meet home acquisition limits
• Must use a Washington State Housing Finance Commission approved lender.
• Complete required Home Buyer Education
* unless buying in a WSHFC targeted area
Buyers can visit the Washington State Housing Finance website for complete information Washington State MCC Income Limits and Property Acquisition Limits
Home Buyer Education
An online homebuyer education course is a convenient and popular option for completing the WSHFC education requirement. Upon completion of the course is a short, easy test and you will be assigned registration number a actual Mortgage Credit Certificate that you will need to provide to your mortgage lender. You will also need the MCC number handy when claiming the tax credit on your tax return.
Recapture Tax
In some circumstances, there is a federal recapture tax if you sell your house within nine years. The purpose of the recapture tax is to retrieve the tax credit from home owners who receive rapid income increases after they purchase, and then sell their house at significant net gain. The tax may be the lesser of 50% of the capital gains or 6.25% of the original loan amount. For this to take place, each of the following must occur:
• Sell your house prior to ninth anniversary date of closing
• Have significant increase in income
• Make a significant net gain in the sale of the home
The information contained in this training has been prepared and distributed for educational purposes only. This training information shall not be construed as a guarantee of loan approval; All loans are subject to underwriter approval. The above information is not guaranteed to be accurate and does not represent the opinions of Guild Mortgage Company. Paul Johnson is a Mortgage Originator, MLO#1012068, licensed in Washington state and living in the greater Seattle area. Paul is an industry educator, public speaker and an award-winning entrepreneur. He and his team are available to serve his clients in Washington state from the Seattle office of Guild Mortgage Company NMLS#3274. He can be reached at pjohnson@guildmortgage.net or http://www.guildmortgage.com/officers/pauljohnson-seattle.html
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