First-time homebuyers that are also low-income buyers may qualify for a mortgage credit certificate. While you have to pay for the certificate, it can give you a decent tax credit, helping you to lower your tax liability and therefore the overall cost of your mortgage.
If you are eligible for a mortgage credit certificate, it helps to know the pros and cons of buying it before you do so.
The Pros of Mortgage Credit Certificates
Mortgage credit certificates have many benefits including the following.
You Can Get a Credit for up to 20% of the Interest Paid
The IRS allows mortgage credit certificate holders to write off as much as 20% of the interest they paid for the year. The actual amount varies by state and can vary between 20% and 40%, but most states have a 20% maximum. In addition, there is a dollar amount maximum of $2,000.
Any interest you pay beyond the 20% or $2,000 becomes a tax deduction rather than a tax credit. The tax credit directly reduces your taxable income, reducing your tax liability dollar-for-dollar. A tax deduction gives you a small percentage of the amount you paid in interest as a deduction off the total amount you owe for your taxes.
The Definition of a First-Time Homebuyer is Flexible
When you think of a first-time homebuyer, you probably think of someone that never owned a home before. The IRS allows a more flexible definition of a first-time homebuyer though. Anyone that meets the following may qualify:
- You haven’t owned a home in the last three years
- You will buy a home in a HUD targeted area
- You recently divorced and need to purchase your own home
The MCC Makes Your Mortgage More Affordable
Even though you have to make the full principal and interest payment every month, you may be able to afford more with the tax credit. If you can budget properly, knowing that you’ll receive around 20% of the interest you pay back at tax time, you can take a mortgage payment that you may otherwise have difficulty affording. Of course, you need to look at your monthly income and liabilities to make sure you are comfortable making the payment every month and waiting for the tax credit at tax time.
You Can Use Any Type of Financing
As long as you take out a first mortgage, it doesn’t matter the type. You can use the Mortgage Credit Certificate with conventional, FHA, VA, or USDA financing. The lender sells the certificates and decides for themselves what programs they will offer it on. You can shop around and ask lenders if they offer the MCC for the program that you qualify for, such as an FHA or USDA loan.
The Cons of the Mortgage Credit Certificate
Any program has a downside, including the Mortgage Credit Certificate Program. Keep the following cons in mind as you decide if it’s right for you.
Not Everyone Benefits
First, in order to qualify, you must meet the income restrictions for your county. If your household makes more than the maximum allowed, you won’t qualify. Even if you do qualify, though, if you don’t make enough money for the tax credit to make a difference, you may pay for a certificate that doesn’t give you any tax benefits at tax time.
You May Owe Recapture Tax
If you sell your home too soon and meet the following factors, you may owe some of the credit you received back in what’s called a recapture tax.
- You sell the home within nine years
- You make a lot more money than when you bought the certificate
- You have capital gains from selling the home
Luckily, only those that meet all three of the above factors will pay the recapture tax. If you sell the home after nine years, you don’t have to worry about it. If you are subject to recapture tax, you owe the lesser of 6.25% of the original mortgage amount of 50% of the capital gains from the sale.
You Won’t Benefit if You Don’t Itemize Your Tax Deductions
If your tax deductions don’t exceed the standard tax deduction of $12,200 for individuals or $24,400 for couples, you won’t be able to use the MCC. Before you pay the estimated $600 for the certificate, take a close look at your tax situation or talk to your tax advisor to determine if you would benefit.
The Mortgage Credit Certificate is a great way to help low-income borrowers buy a home. If you don’t own a home or haven’t owned one for the last three years, inquire about the MCC requirements in your area. Each county and lender within the county has different requirements, choose wisely, and take the pros and cons of the certificate into consideration.