A Tax Credit Homebuyers Overlook

homes1013_1BY LISA LEE

Many people are unaware of a federal program that helps would-be homeowners save money and qualify for a loan.

The Mortgage Credit Certificate Program was created by Congress to help families with low and moderate incomes own their homes. The program lowers the amount of federal income tax you pay, so that you have more available income to qualify for a mortgage loan and to make mortgage payments.

“The Mortgage Credit Certificate Program has made it possible for many renters to realize their dream of owning their own home. Buying a first home starts you on the path of long-term wealth building by cultivating an asset that will increase in value over time,” says Scott Higashi, EVP of Sales at Prudential Locations.

How will a Mortgage Credit Certificate help me buy a home?

The IRS allows all homeowners to take a federal income tax deduction for the amount of interest they pay each year on their mortgage loan. If you have a Mortgage Certificate Credit (MCC), this tax benefit increases.

With an MCC, 20 percent of your annual mortgage interest qualifies as a direct tax credit, which results in a dollar-for-dollar reduction of your annual federal income tax liability. The other 80 percent of your mortgage interest then qualifies as an itemized tax deduction.

If the amount of your mortgage credit is higher than your federal income tax liability, you may carry the remaining credit forward to the next year’s taxes, for up to three years.

How long will an MCC last?

The Mortgage Credit Certificate lasts for the life of your mortgage loan, as long as you keep that home as your primary place of residence.

What are the MCC requirements? 1. You must either be a first-time homeowner, or you cannot have owned your home at any time in the last three years. 2. The home must be used for your primary place of residence. If you stop living there, the Mortgage Credit Certificate will be canceled and you will not be able to claim the MCC credit. 3. The mortgage loan must be a new loan. Refinanced and existing loans are not eligible. 4. If you sell the home within nine years, sell it for a profit, and your income increases above the requirements, you may be subject to a federal “recapture” tax. This is because the government considers the MCC tax credit to be a subsidy.

Who qualifies for an MCC?

The income limit to qualify for a Mortgage Credit Certificate depends on the size of your family and the county in which you live. In Honolulu County, for example, the current income cut-offs are $123,600 for families of two or less and $144,200 for families of three or more.

There is also a limit to the purchase price of a home that will qualify for an MCC. That limit depends on the county in which you live. In Honolulu County, the current price is $732,692 or less.

“A mortgage lender can help people determine their personal benefit from the MCC, what they can afford for a mortgage, and prequalify them for a home loan. Our REALTORS can put people in touch with reliable lenders,” says Higashi.

HOW DOES A MORTGAGE CREDIT CERTIFICATE WORK?

Here is an example of how an MCC can make home buying affordable for you:

* You obtain a mortgage loan of $300,000 at 4.25 percent for 30 years with monthly principal and interest payments of $1,476 and an MCC credit rate of 20 percent.

* In the first year, you pay $12,652 in interest on your mortgage loan. Because you have an MCC, you receive a federal income tax credit of $2,530 (20 percent of $12,652). If your income tax liability is $2,530 or greater, you will receive the full benefit of the MCC tax credit. If the amount of your tax credit exceeds the amount of your tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability.

* The remaining 80 percent of your mortgage interest, or $10,122, qualifies as an itemized income tax deduction.

* To receive the immediate benefit of your MCC tax credit, you can file a revised W-4 withholding form with your employer to reduce the amount of federal income tax withheld from your wages and increase your take-home pay by $211 per month (your annual tax savings of $2,530 divided by 12 months).

* If you apply the $211 increase in your take-home pay to your monthly mortgage payment of $1,476, your effective monthly payment is $1,265 ($1,476 minus $211).

To find out more about what a Mortgage Credit Certificate can mean for you, talk with your mortgage loan expert.

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