General Overview of MCC
The Mortgage Credit Certificate (MCC) program assists first time homebuyers to qualify for a mortgage. In most counties around the country, there are target areas where non first time homebuyers can purchase a home and benefit from the MCC Program. Each MCC Program for a jurisdiction (city, county and/or state) has maximum income limits and maximum purchase price limits specific to that area. The information below provides a general overview of the program and how it will benefit a first time homebuyer.
Table of contents
What is an MCC?
How does the MCC "reduce" the mortgage interest rate?
What are the purchase price and income limitations on MCC holders?
How does a borrower obtain an MCC?
What about refinancing or assuming a mortgage?
Is there a recapture of benefits?
Eligibility Requirements for MCC Program
What is an MCC?
The MCC operates as an IRS tax credit. The MCC tax credit (up to 20% of annual mortgage interest paid) reduces the federal income taxes of qualified Borrowers purchasing qualified homes, thus having the effect of subsidizing their payments.
How does the MCC "reduce" the mortgage interest rate?
Table 1 - Effect of a Mortgage Credit Certificate
| 1. First Mortgage Amount |
$85,000 |
| 2. Mortgage Interest Rate |
8.0% |
| 3. Annual Interest Payment |
$6,774 |
| 4. Mortgage Credit Certificate Rate |
15% |
| 5. Annual MCC Amount (line 3 x line 4) |
$1,016 |
| 6.Monthly MCC Amount (line 5 ÷ 12) |
$85 |
In Table 1, a Borrower with an 8.0% fixed rate 30-year mortgage of $85,000 would make $6,774 in interest payments during the first year of the mortgage. By using a 15% MCC, $1,016 (15% of $6,774) of the payments would be allowed to be taken as a "tax credit" from that buyer's federal income tax liability. The remaining 85% (in this case, $5,758) still is taken as a "tax deduction" from the homebuyer's adjusted gross income.
Table 2 - Comparison of Tax Credits to Tax Deduction
|
Tax Credit |
Tax Deduction |
| Total Income |
$35,000 |
$35,000 |
| Deductions |
($5,758) |
($6,774) |
| Total Taxable Income |
$28,391 |
$27,375 |
| Federal Tax Liability |
$4,334 |
$4,106 |
| Tax Credit |
($1016) |
($0) |
| Tax Paid |
$3,328 |
$4,106 |
Table 2 shows that if the Borrower in this example has an annual tax liability of $1,016 or more after all other deductions and credits, the after-MCC credit interest paid on the mortgage is reduced to 6.53%, i.e., annual interest of $6,609 on $85,000 corresponds to a 6.53% loan. This effect, however, is achieved only when the MCC holder-Borrower has sufficient income tax liability to receive the entire benefit from the MCC tax credit.
What are the purchase price and income limitations on MCC holders?
Table 3 shows the purchase price limits and income limits on MCC Program participants for one particular county in California. These limits will vary depending on the geographic region. A homebuyer should contact their local MCC Program for the limits in their area.
Table 3
| Purchase Price |
Non-Target Area |
Target Area |
| New (never lived in) unit |
$169,100 |
$206,700 |
| Existing (resale) unit |
$115,100 |
$140,700 |
| Income Limits |
Non-Target Area |
Target Area |
| 1 and 2 person households |
$37,200 |
$44,640 |
| 3+ person households |
$42,780 |
$52,080 |
How does a borrower obtain an MCC?
Mortgage Credit Certificates are available to first time home buyers and home buyers in target areas who complete an MCC application with a participating lender. The MCC Program Administrator does not underwrite the loans. Rather, all underwriting and execution of required state and federal certifications or affidavits are performed under the MCC Program agreement by Lenders participating in the program. The MCC Program Administrator would review executed certifications and affidavits from the Lender in order to determine qualification and eligibility. Lenders process the mortgages using standard procedures, with adjustments to those procedures as needed in order to satisfy MCC requirements.
May an MCC be used in connection with a refinanced loan or to assume an existing mortgage?
A Reissued MCC (RMCC) can only be issued to a homeowner who is refinancing an existing mortgage if the mortgage is held by a current MCC holder. MCC holders who have refinanced their mortgages must be issued an RMCC to continue taking their tax credit. For a mortgage to be assumed, the seller of the property in question must be an MCC holder and the sales price of the house being sold must fall under the sales price maximum for the program. In all other cases, only new, first mortgages are eligible for MCC participation.
Potential for recapture of portion of the tax
In order to discourage individuals from buying a home primarily to benefit from the tax credit and short term appreciation potential, the federal government has initiated a recapture of a portion of the tax credit if a home is sold within the first nine (9) years after purchase. The MCC Program Administrator MCC staff and your lender can outline the specifics of this recapture program at the time of your application.
Eligibility Requirements for an MCC Program
The following are typical eligibility requirements for an MCC Program:
- MCCs will be available only to "first-time home buyers," meaning those persons who have not owned a "principal residence" within the past three years. (Target area buyers need not be "first-time home buyers".)
- Participating mortgage lenders will prepare MCC applications and forward them to the MCC Program Administrator.
- Applicants may buy a residence only for their own occupancy, not for rental or reinvestment. Occupancy as "principal residence" must be within 60 days of the close of escrow.
- Depending on the local program, applicants will pay a non-refundable application fee ranging from $150 to $500 at the time the lender applies to the MCC Program on their behalf.
- MCCs can be used with new first mortgages only (no refinancing or assumed mortgages).
