Liz Freeman's Weekly Mortgage Blog

Mortgage Credit Certificate Equals Free Money for Home Buyers
If you have never heard of the Mortgage Credit Certificate (MCC) programs, you're not alone. Many lenders haven’t either. But they have been available for eligible home buyers since the Tax Reform Act of 1984! Not only does this program return cash to the borrower the entire life of your loan, it makes qualifying for a home purchase easier. Here's how.

Most people know that mortgage interest is tax deductible. Those that take the standard deduction don’t derive any tax benefit from paying mortgage interest instead of rent. Unless they have a Mortgage Credit Certificate (MCC). These are issued by state and local governments and borrowers get their mortgages from lenders that participate in the program. There are certain eligibility criteria — MCCs are for those who haven't owned a home in at least three years, there are income limitations, and there is a maximum purchase amount.

With an MCC, the IRS allows taxpayers to not only deduct mortgage interest, but also gives a credit of up to 20% of mortgage interest paid. And the lender will deduct that credit from the house payment when calculating the applicant’s debt to income ratios, qualifying them for a larger loan than they otherwise could. Here's an example:

* A mortgage of $250,000 at 6.00% for 30 years has monthly principal and interest payments of $1,499 and an MCC credit rate of 20%.

* In the first year, the buyers pay a total of $14,916 of interest on the mortgage loan. With the MCC, the buyers receive a federal income tax credit of $2,983 (20% of $14,916).

* The remaining 80% of mortgage interest, or $11,933, qualifies as an itemized income tax deduction.

* To receive the immediate benefit of an MCC tax credit, mortgage applicants file a revised W-4 withholding form with their employers to reduce the amount of federal income tax withheld from wages and increase take home pay by $249 per month ($2,983 divided by 12).

* By applying the increase in take home pay of $249 towards the monthly mortgage payment of $1,499, the effective monthly payment would be $1,250, ($1,499 minus $249).

* This means that instead of needing an annual income of $64,243 to qualify for the purchase (assuming a 28% housing expense to gross income ratio), the buyers only have to earn $53,571.

So when shopping for your mortgage, check with your state to see if you qualify for an MCC. Make sure you tell your lender that you have an MCC, and make sure it participates in the program before starting your loan application.