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In certain areas of the United States, first-time home buyers can receive a tax credit designed to lessen the burden of a monthly mortgage. While the specifics can change from state to state, and even county to county, first-time homeowners may be able to participate in a Mortgage Credit Certificate program.
What is a Mortgage Credit Certificate?
At its core, an MCC—as it’s commonly known—offers an income tax credit to first-time home buyers. Theoretically this frees up a household’s income to make mortgage payments. An MCC can save you up to $2,000 a year for the lifetime of your loan.
An MCC, however, can be complicated. To help digest the certificate program, Movoto Real Estate has broken down its pieces. With our state-by-state guide, you’ll be able to answer:
- What is a tax credit?
- How does a Mortgage Credit Certificate work?
- Who is eligible?
While not every area has an MCC program, many states have plans to help first-time home buyers through alternative means. We have included a discussion of one such plan, known as a Mortgage Revenue Bond Loan.
Purchasing a new home can be a daunting task. Worse, the idea of homeownership might seem out of reach to some families. Fortunately, there are means to make homeownership more reasonable, thus giving those with modest incomes a chance at the American Dream.
What is a Tax Credit?
Understanding what a tax credit is goes a long way to demystifying an MCC. In layman’s terms, a tax credit is a sum of money that is deducted from the total amount you would pay to the government. A tax credit reduces how much you pay on your taxes. This means that if you have a $1,000 tax credit, you would pay $1,000 less on your taxes.
How Does A Mortgage Credit Certificate Work?
As we just explained, the MCC reduces your federal income tax liability. With an MCC, first-time home buyers save money each month.
Let’s break this down with a common example:
A household with a loan amount of $100,000 at an interest rate of 6 percent for 30 years pays about $6,000 of interest in the first year. With a 30 percent MCC, the household would receive a direct federal income tax credit of $1,800 ($6,000 x 30 percent). This would translate into $150 of extra income each month.
Who is Eligible?
As with the rest of the MCC, eligibility is less than clear. There are, however, basic requirements. We recommend you contact your local state government or housing authority to learn all the specifics. Nevertheless, we can offer basic guidelines.
MCCs are available to:
- First-time home buyers (Something of a misnomer, this means a person could not have owned a home within the previous three years.)
- Those who complete a normal loan application process with a participating lender
- Those who are purchasing a home as a main residence
- Home buyers whose property falls within a specified price range
- Home buyers who meet income guidelines
It should be noted, however, that there can be exceptions for house hunters who purchase homes in specific areas, know as target areas. In many cases, veterans are also exempt.
Target Areas versus Non-Target Areas
Areas that are “targeted” by the federal government are locations where 70 percent of families who live there earn an income that is 80 percent or less than the statewide median income. Agencies utilize Census Tracts to determine whether an area is targeted. (If you do not know your Census Tract, and we are betting you don’t, you can find it here.)
Most states will have clearly defined information on whether the home you are looking to purchase is inside a target area. Rules that limit an MCC to first-time home buyers can be waived for home buyers looking to purchase in a target area.
What is a Mortgage Revenue Bond Loan?
Not all states have an MCC program. Some areas instead utilize Mortgage Revenue Bond Loans to help first-time home buyers.
A mortgage revenue bond loan is a loan where the cost of borrowing is partially subsidized by a mortgage revenue bond. These types of bonds, which can vary greatly, are designed to lower the cost of homeownership. In other words, MRBs help low- and middle-income first-time home buyers by offering long-term mortgages at below-market rates.
The benefit of an MRB loan is a low interest rate that can result in a smaller monthly mortgage payment. Some have pointed out that a smaller mortgage payment may increase a home buyer’s ability to qualify for a mortgage they might not have received otherwise.
In order to qualify, prospective home buyers must earn below stated threshold levels for annual income, and must financially qualify for a mortgage from a conventional lender.
Many mortgages that were funded by MRBs first originated through the Federal Housing Administration, Freddie Mac, and Fannie Mae.
MRB funding is not available throughout the entire country. The process is run on a state-by-state basis. In addition, a state program might target specific areas or neighborhoods based on the state’s demographics.
Furthermore, eligibility differs by program. Some common requirements include:
- The home must be the primary residence
- The prospective buyer must have not owned a home in the past three years