What Are Qualified Mortgage Credit Certificates for Home Buyers?

It’s One of the Lesser-Known Tax Breaks…

If you’re like most homeowners, you itemize deductions on your tax return each year and claim your deductible mortgage interest. Did you know there’s an alternative? It’s called the mortgage credit certificate (MCC). The IRS calls it the “Federal Mortgage Subsidy.”

Sounds like a good thing for those who happen to know what it is, right? And you need to know about it as a first-time home buyer — before you buy your home.

Why You Should Know About the MCC

With the MCC, you can get back up to 20% of your interest as a tax credit. That’s 20% of the mortgage interest you paid. Not just once. You can keep claiming benefits year after year.    

In Rhode Island, for example, qualified first-time homebuyers are eligible for a certificate that gives a “dollar-for-dollar tax credit of up to $2,000” which may be claimed yearly throughout the life of the mortgage.

Is the MCC only for first-time home buyers? Not exactly. It can be for anyone who hasn’t owned a home in the last three years, or people buying in “targeted areas” as defined by their state or by the Department of Housing and Urban Affairs (HUD). Buyers who are in active military service as well as veterans can also get this credit.

But no matter where or on what basis you get it, you’ll probably need to be proactive. Don’t expect your mortgage broker or the loan officer from the bank to tell you about it if you don’t ask. They can help you apply for the qualified mortgage credit certificate with your state or a local housing finance agency. Or you can do a little searching and talk to that agency yourself.

How the MCC Is Better Than the Itemized Deduction

Most every homeowner knows about the itemized deduction opportunity. Any itemized deduction you claim on your mortgage interest is capped at your marginal rate. That is the highest percentage you pay for your taxes. 

In contrast, a tax credit is fully credited, reducing your taxes that much more. 

Wait, there’s more! The remaining 80% mortgage interest you paid over the year can be claimed as an itemized tax deduction, further lowering your federal tax payment.

Now, there is an income limit to claim these credits, but it’s high enough to give many buyers a break.

There’s also a limit on the home price to get the credit, and there is a fee to claim it.

Helpful Facts About the Mortgage Tax Credit

The point of the mortgage credit certificate is to assist home buyers with modest incomes as they pay the lender interest on the mortgages they take out on their homes.

  • Mortgage credit certificates help lenders approve loans for a bigger pool of borrowers than could otherwise qualify.
  • Many mortgage loans can be taken out with mortgage credit certificates.
  • Borrowers may apply for the mortgage credit certificate if the home will be their main residence.

State MCC rules and credit limits do vary, so look up your state’s version to learn more details. You’ll need an MCC that is in the area covered by the particular government agency where the certificate is issued.

How to Go About Claiming the Tax Credit

The credit limit depends on your own credit rate combined with the amount of tax you owe.

Part I

On Form 8396, Part I, you’ll calculate the mortgage interest credit for the current tax year, given your MCC credit rate. You’ll also write this amount on your Form 1040, Schedule 3, on line 6g. On Schedule A, state the amount of your “reduction of home mortgage interest deduction.”  

So, start with Form 8396, where you’ll write down:

  • The mortgage interest you paid for the tax year. If another person (except for a spouse filing jointly) co-owns the home, enter only the interest you paid.
  • Your credit rate as shown on your MCC.
  • Any mortgage interest credit to carry forward from the previous three tax years (see your Form 8396 from the previous year).

Regardless of what credit rate your certificate is issued for, $2,000 is the limit to what you may claim, and what you’re allowed to carry over from year to year. This is because the IRS limits the maximum tax credit allowable per year at $2,000 for every MCC recipient. (See more about carrying tax credits over in the next section.)  

Among co-owners who are tenants in common, percentages of the $2,000 limit get divided to each co-owner according to the interest they hold in the home.

Part II

Part II comes into play if Line 7 is greater than Line 9 on Part I. If so, you’ll use Part II to add up how much mortgage interest credit to carry forward to the next three tax years (or until it’s all claimed — whichever comes first).

But wait! You say. What’s all this about carrying the credit over? Explain like I’m 5!

OK, say your certificate says your mortgage interest credit is $2,000. This year, your regular tax liability is $1,400. If this is the only tax credit you’re claiming, then you’ll be leaving $600 in credit on the table. But the IRS says you get to “carry forward” that $600 over three years — or whenever you finish claiming it all.

So, that’s how carrying the credit over works. When you’re finished, file Form 8396 with your tax return. Check “About Form 8396, Mortgage Interest Credit” when tax time rolls around for updated information.

When You’re Selling or Refinancing a Home With an MCC

If you buy your home with a mortgage credit certificate, and decide to sell the home within nine years, you might be expected to repay a recapture tax. Basically, that’s a portion of your credit. As the IRS states:

Use Form 8828 to figure and report the recapture tax on the mortgage subsidy if you sold or otherwise disposed of your federally subsidized home.”

If you refinance, you can’t retain your MCC balance, but you can keep your mortgage credit certificate by requesting a reissue. The MCC can be reissued to you at any point up to one year after you closed on the refinance. Didn’t get a new certificate? Call the state or local agency that issued your prior home’s certificate about getting a new MCC. The amount of the credit may differ on your new home.

Note that you can’t apply for a first-time MCC when you refinance. Only before your original home purchase.

Once Again, Knowledge Is Power

When you’re wrapped up in the home buying experience, things can get a little hectic. There could be benefits available that neither your agent nor your mortgage rep remember to tell you about. Or perhaps they’re not aware that it’s available. And if you find out later, the chance has passed.

The MCC is one of those pieces of knowledge. Don’t leave money on the table — ask about it.

Supporting References

U.S. Internal Revenue Service: About Form 8396, Mortgage Interest Credit; see also Form 8396.

U.S. Internal Revenue Service: About Form 8828, Recapture of Federal Mortgage Subsidy.

FDIC: Mortgage Tax Credit Certificate (MCC).

And as linked.

Photo credits: Eren Li and Olya Kobruseva, via Pexels.