First Time Home Buyer Resources (Part 1 – the MCC)

A Mortgage Credit Certificate (MCC) is a federal dollar for dollar tax credit that program participants may take advantage of.  This program was authorized in the 1984 Tax Reform Act, and is a tool to help homebuyers that usually fall in the category of needing "workforce housing".

Several Cities and Counties offer the Mortgage Credit Certificate program to first time homebuyers - those who have never owned a home, or have not owned a home for the previous three years - who either meet the income criteria set for their local program, or are purchasing their home in a Federal designated census tract. Most State Housing Finance Agencies will have lists of local Cities and Counties offering the Mortgage Credit Certificate program. Follow this link for details at the State of Oregon.

The tax credit will offset federal income tax owed, usually up to a maximum of $2,000 per year for the life of the loan. Homebuyer may then deduct any mortgage interest over and above their tax credit with any other qualifying itemized deductions. Parameters of the MCC program are set forth by the Local City/County, and usually require an application fee of $250-300 that is paid by the applicant. Income limits are established, and eligible homebuyers usually earn up to a maximum of 80-120% of HUD median income for the County.

The potential first time homebuyer has to:

1. Decide if the MCC meets their needs
2. Select a participating lender
3. Call the lender and find out if they qualify for the MCC
4. The lender submits the paper work to Local City/County for the certificate
5. Once qualified, begin shopping for a new home

Once the home is purchased through the participating lender, a homebuyer has to:

6. Adjust their withholding on their W-4 form with their employer and
7. File an IRS 8396 form with their federal income tax return.

The following is an example of how the tax credit works:
Mike & Kelley Buyers qualify for a $120,000 mortgage loan for a 6% interest rate for 30 years. Local City/County issues a tax credit under the MCC program at a rate of 20%.
The amount of the tax credit is determined as follows:

· $120,000 x .06 = $7,200 (first year's mortgage interest)

· .20 (tax credit rate) x $7,200 = $1,400 (tax credit amount)

· $1,400 / 12 = $120/month savings per month

The $120 monthly savings can be used to increase the homebuyer's income or reduce the housing expense ratio for qualifying purposes. The residual mortgage interest for the year of $5,760 ($7,200 minus $1,440) can be taken as a regular itemized deduction. The homebuyer needs to adjust their W-4 with their employer to realize the benefit of the credit. For the loan in this example, monthly principal and interest is $719.46, and the MCC allows the homebuyer an additional $120 per month to put toward their mortgage payment. When the savings are applied to the mortgage payment, the tax credit for the first year reduces the interest rate from 6% to 4.38%.

As with most subsidized programs, there is a recapture provision that remains in place for 9 years.

As a mortgage consultant, I find the Mortgage Credit Certificate program helps homebuyers with tight debt-to-income ratios. Being able to deduct the tax credit amount the homebuyer qualifies for from their monthly housing expense can help tremendously with meeting a maximum debt-to-income ratio requirement on a loan program. Although Southern Oregon cities and counties are not offering the MCC program at this time, I've used it a great deal in many California communities.

See you at the closing table!

Karen Cooper - OR/CA Mortgage Consultant - www.Quality4Loans.com