Because after-credit interest paid on the mortgage is reduced, the MCC effectively reduces the interest rate in the first year. Without an MCC, the annual
interest of 5 percent on $300,000 would be $15,000. With the MCC, the annual interest amount would be $12,000, which in effect corresponds to a 4 percent interest
rate on the same $300,000 mortgage in the first year.
Various cities and counties as well as certain state housing agencies can apply for
authority to issue MCCs to low- and moderate-income homeowners. Each MCC
provider determines the percentage of their MCC program based on their needs
and any caps set forth by their governing state authority.
The MCC benefit in California can equal 15 percent to 20 percent. As mentioned,
if the MCC tax-credit rate is above 20 percent (as it is in some areas nationally),
then the maximum annual credit allowed by the IRS is set at $2,000. If the MCC
tax-credit rate for the program is at or below 20 percent, there is no maximum
dollar amount, and because of this, many MCC providers offer a tax-credit rate
of 20 percent for their programs.
Some other MCC providers include Colorado Housing and Finance Authority,
Golden State Finance Authority and the City of Los Angeles MCC — all of which
offer a 20 percent tax-credit rate. The Texas Department of Housing and Community
Affairs offers a 40 percent tax-credit rate, which is capped at $2,000 annually.
Some housing-finance agencies that offer first mortgages may have differing
mortgage-qualification overlays or restrictions. The California Housing Finance
agency, for example, allows MCCs to be issued with first mortgages; however,
an MCC may not be used for qualifying purposes on California Housing Finance
Agency first mortgages.
Among the MCC eligibility requirements, applicants must be first-time homebuyers, which means they have not had ownership interest in a home in the last
three years. Three years of federal tax returns are typically required to verify this.
There are exceptions to the first-time homebuyer requirement for veterans and
homes located in targeted areas.
Borrowers also must be within the MCC program’s income limits, and they
must live in the home as their primary residence for the entire term of the loan.
The income limits are based on household size at or below a certain percentage
of the area median income (AMI). In California, for example, the MCCs are typ-
ically available for up to 115 percent of the AMI or up to 140 percent of the AMI
also will have sales-price limits, usually established by the county in which the prop-
erty is located.
If the amount of MCC credit exceeds the homebuyer’s tax liability or the annual
limit of $2,000 (for MCC rates above 20 percent), the unused portion of the credit
may be carried forward for up to the next three years, or until used, whichever
comes first. The borrower may want to consider amending their W- 4 withholding
form on file with their employer to allow for the maximum benefit of the
MCC tax credit.
The effective interest rate assumes the borrower is able to take advantage of
their full MCC credit the first year. If the borrower does not owe the IRS at the end
of the tax year, they do not receive the credit.
Homebuyers are encouraged to consult with a tax adviser and employer to
help them with the necessary tax forms and, if they so choose, to properly adjust
their tax withholding via the W- 4 form. There are application fees for the MCC
program, which may vary by the MCC administrator; however, the potential tax
savings over the course of a 30-year mortgage far surpasses the fee.
Although uncommon, recapture tax may apply under certain conditions within
the first nine years of homeownership. The recapture tax is designed to “recapture”
some of the financial benefit of the MCC if three separate conditions all occur. Those
are the following: the home is sold within nine years, the recipient’s household
income rises significantly and the value of the purchased house rises significantly.
A borrower will not lose the ability to use the annual MCC if they refinance their
first-mortgage loan. They can still receive the benefits of the MCC and refinance
their loan at any time without the potential for recapture tax.
MCCs shouldn’t be a secret. The program should be a necessary part of the
education process for first-time homebuyers, if they qualify. These homebuyers
only have the opportunity at the time of purchase to apply for the MCC. Once
approved, they will get a long-term benefit to use the tax credit each year based
on the mortgage interest paid for the life of the loan. This is huge savings for the
borrower and will help the originator in maintaining their relationship as they can
remind their borrowers annually. n
Mortgage credit certificate
A homebuyer-assistance program designed to help low- to moderate-income
families afford homeownership. The program allows homebuyers to claim a
dollar-for-dollar tax credit for a portion of mortgage interest paid per year.
Source: National Council of State Housing Agencies
Tonya Todd is senior vice president of strategic products at Mountain West Financial
Inc. She joined the Mountain West team in 2012 as leader of affordable-housing programs and is responsible for the company’s involvement in downpayment-assistance programs. Todd also works closely with nonprofit organizations and housing-finance
agencies to develop lending products. Prior to joining Mountain West, Todd spent almost nine years
on Bank of America’s affordable-housing team. Reach her at firstname.lastname@example.org.