What Are Mortgage Credit Certificates?

Mortgage Credit Certificates Explained in Under 4 Minutes

A woman holds a pillar of the front porch of a home.
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Mortgage credit certificates are a way for qualifying first-time homebuyers to lower their annual tax burden. They’re granted by eligible lenders and are used to help low-income families qualify for a mortgage. 

Let’s take a look at what mortgage credit certificates are, how they help homebuyers, and who can qualify for them.

Definition and Examples of Mortgage Credit Certificates

Mortgage credit certificates allow first-time, lower-income homebuyers to receive a dollar-for-dollar credit on their taxes based on the mortgage interest they’ve paid. 

The Deficit Reduction Act of 1984 established the Mortgage Tax Credit Certificate program. Mortgage credit certificates are not loans, nor are they a tax deduction—they are a federal tax credit to help increase housing affordability. They may even help reduce monthly mortgage payments.

The tax credit percentage you can receive will vary by state, but it’s generally between 20% and 40% of your total mortgage interest. 

The federal government caps the amount of mortgage tax credit you can receive each year at $2,000. Any mortgage interest that doesn’t fall under the mortgage credit certificate is still deductible on your standard tax return by completing an itemized deduction.

  • Alternate Names: Mortgage Tax Credit Certificates, MCC

How Mortgage Credit Certificates Work

Let’s say that you and your spouse are looking to buy a home for the first time. Fortunately, you’re located in an area where the cost of living is low. Unfortunately, you recently took a pay cut at work that places you firmly in the low-to-moderate income group. 

Because of the loss of income, you no longer qualify for the loan for which you were pre-approved. Your lender tells you about mortgage credit certificates, which help you qualify for your loan. The mortgage credit certificate could be added to your income so that your debt-to-income ratio would meet the bank’s standards. 

Once you’re approved for the mortgage credit certificate, you can take the tax credit when you file your annual taxes. Or, you can amend your W-4 tax withholding form with your employer to reduce the amount of income tax that they withhold to match your total credit. Your mortgage credit certificate is valid for the life of your loan as long as the home is your primary residence.

The first-time homebuyer requirement is waived for active-duty military and veterans and for buyers in targeted areas, such as identified by the U.S. 

Here’s an example of how your taxes might look with and without a mortgage credit certificate:

  With Mortgage Credit Certificate Without Mortgage Credit Certificate
Yearly income $60,000 $60,000
Deductible mortgage interest $8,000 $10,000
Taxable income (at a 12% rate) $52,000 $50,000
Federal income tax $6,240 $6,000
Mortgage Credit Certificate -$2,000 N/A
Total tax owed:  $4,240 $6,000

What Do Mortgage Credit Certificates Mean For You?

If you’re a low-income, first-time homebuyer, you’ll want to see if your bank participates in the mortgage credit certificate program. Not all banks do, and in many cases, banks must pay an annual fee to be in the program. However, if your lender is involved, it’s worth seeing if you qualify. 

There are both income and sales price limits for mortgage credit certificates, so not everyone will qualify. Be aware, however, that these limits will vary according to state. You’ll also need to occupy the property as your primary residence.

If you do meet all the requirements, applying for mortgage credit certificates can be a valuable way to save money on your taxes and make homeownership more affordable. 

Finally, if you take advantage of this program, know that if your circumstances change greatly, you may be liable to pay back a portion of the mortgage credit certificate benefit. All three of these criteria must be met for that to happen:

  • You sell your home within nine years of purchasing it
  • You make a gain from the sale of the home
  • Your income has increased significantly from the time that you bought the home

Any recapture tax is payable when you sell the home. It’s capped at the lesser of 6.25% of the original principal balance of the loan or 50% of the gain on the sale. Most people who receive mortgage credit certificates are not subject to this recapture, but for those who are, they may be able to take advantage of programs that reimburse for it.

Key Takeaways

  • Mortgage credit certificates offer a dollar-for-dollar tax credit on mortgage interest.
  • First-time, low-income home buyers are eligible for this program.
  • The maximum amount of tax credit you can receive each year is $2,000.
  • Once approved, you’ll receive the mortgage credit every year for the life of your loan as long as it is your primary residence.