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Mortgage Credit Certificate
Mortgage Credit Certificate, usually referred to as MCC, is issued by the state governments in the United States to cater to low to moderate-income homebuyers. It helps the First time home buyers to get a dollar for dollar tax credit on the mortgage interest they paid in a financial year. Mortgage Credit Certificate is a special program designed by Housing finance agencies to help tax liabilities of first time home buyers through offset a portion of their mortgage interest. It can be a great way to utilize your mortgage to save money on our taxes.
How does Mortgage Credit Certificate work?
Mortgage Credit Certificate is issued only to the qualified borrowers to make buying a home more easy and affordable. Although its process to issues MCC varies according to each state guidelines, borrowers must meet the eligibility criteria to get the tax credit benefits through MCC.
You can apply for the MCC if you are your income limit falls within your state’s limit at the time of applying for the lone. The lender will apply it on your behalf for the MCC program though the IRS (. After getting approval from the IRS. The approval may take a week to get the approval, but once approved, you can close on your home purchase in 90 days. Most of the states charge a non-refundable fee for applying for an MCC, and the fee can vary from 300 to 800 from state to state.
Once approved, you can claim for the tax credit when you file a federal tax return, or you can also get the credit every month by filing W-4 forms with your respective employer.
Who is eligible for the Mortgage Credit Certificate?
The requirement to claim the MCC varies, but below are the typical requirements for every state to get MCC benefits.
>Buyer must show the purchased home as their primary residence
>First-time Homebuyer (It can be waived in certain circumstances)
>The total annual income must not exceed state income restriction limit
>The total cost of the home must not exceed state purchase price limit
How much can you save through MCC?
The rate of tax credit under MCC is different in each state; however, it typically varies between 20% and 40%. The upper limit is capped at a maximum of $2000 each year if the state’s rate is more than 20%. Below the example of MCC calculation and how much home buyers can save on their mortgage interest payment.
If you borrow a $200,00 loan for your home purchase at an interest rate of 6%, and your state’s MCC percentage is 20%. You can get an annual tax credit of $2,400. You are entitled for the tax credit until you continue to own the home and pay interest on the mortgage. The MCC will be void in case the mortgage is refinanced, even if the buyer owns the house.
MCC tax credit calculation for the above example:
Total Loan Amount: $200,000
Loan Interest Rate: 6%
Amount of Interest paid in a tax year: $200,000*6%=12,000
MCC Percentage: 20%
Entitle Tax Credit: 12,000*20% = 2,400
Closing Note
MCC can be a great help to first-time home buyers and tight in budget, as being a tax credit, it puts the money directly into the pockets of buyers. Furthermore, the home buyer could show the tax credit benefit under MCC as an additional income to qualify for a larger sum of the loan than what they are available to them according to their annual income.
Despite its benefits, most people do not utilize it to ease their burden of taxes owning to the strict income limit set for the qualification by the IRS. The maximum income limit is the same for married as well as single households; hence it is difficult for a married couple to qualify for the MCC benefits. Additionally, if the buyer sellers their home within the first nine years or your income increase after the purchase, the savings of MCC cab be subject to ‘recapture tax.’
MCC can be beneficial if you are a first time home buyer, and you plan for a long term tax saving. The perks of MCC may significantly reduce your tax liabilities as well as it can boost your monthly income and qualify you from a bigger some of the loan and right home.