Mortgage Credit Certificate: How MCCs Work

A mortgage credit certificate (MCC) is a federal tax credit for first-time home buyers who meet certain requirements based on their income, location, and home price. Participating lenders issue an MCC to borrowers, which converts some of the borrower’s mortgage interest into a tax credit. Your state and local Housing Finance Agency (HFA) will determine the eligibility requirements and provide education for lenders who wish to participate.

Current homeowners looking to refinance their mortgage might qualify for an MCC if they meet eligibility requirements and live in a targeted area defined by the United States Department of Housing and Urban Development (HUD). Learn more about when to refinance a mortgage.

Before qualifying for a mortgage credit certificate, potential home buyers must undergo an application process and meet the following eligibility requirements.

• First mortgage: First-time home buyers who have applied for a thirty-year fixed-rate mortgage and have no interest in another home within the past three years can qualify. Home buyers in targeted areas may not necessarily need to be first-time buyers.
• Income limits: The purpose of the MCC program is to help individuals with low to moderate incomes buy their first homes. Local HFAs determine your eligibility based on the combined annual income of all household occupants eighteen years or older. Household income limits are higher in targeted areas than in nontargeted areas.
• Purchase price limits: Only homes within a specific price range can qualify for MCC tax credits. Purchase price limits vary depending on whether the house is in a targeted or nontargeted area. Homes in targeted areas typically have higher purchase price limits to encourage more homeownership in those areas.
• Property type: You can use an MCC to purchase a new or existing single-family home, condominium, townhouse, half-plex, or duplex. Although specific requirements depend on location, triplexes and quadruplexes are typically not eligible for MCC programs.
• Principal residence: Potential homebuyers must prove they intend to use the home as their primary residence.

Mortgage Credit Certificates (MCC) work by providing homeowners with a tax credit equal to a portion of the interest they pay on their monthly mortgage payment (10–50 percent, up to $2,000). Unlike a tax deduction, which reduces your taxable income, a tax credit directly reduces your federal income tax liability by the amount of the credit.

To determine your mortgage credit amount use the following formula:
Eligible credit amount = mortgage amount x mortgage interest rate x mortgage credit certificate percentage

For example, if you apply for a mortgage loan of $120,000 with a 4 percent mortgage interest rate, your annual mortgage interest is $4,800. With a 20 percent MCC, you can claim $960 as a credit on your annual tax return. You can continue to claim this credit for the life of the mortgage so long as you remain an eligible homeowner.

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