Before venturing out into the real estate market, first-time home buyers should be well away of the plethora of programs at their disposal to make the process of making mortgage payments easier.
Since 2009, one of the most popular ways for virgin buyers to both save and qualify for a mortgage has been the Mortgage Credit Certificate. The MCC is a first time home buyer’s credit that allows buyers a dollar-for-dollar match on a portion of their mortgage interest paid annually.
The MCC is an advantageous program for new home buyers for a number of reasons. There are almost no limitations as to which type of mortgage you can use the MCC tax credit on, although some programs have restrictions, namely on adjustable rate mortgages.
Additionally, the savings can amount to thousands of dollars over the life of the loan. What’s more, the MCC program provides the home buyer with a tax credit, not a tax deduction.
Is the First-Time Home Buyers Credit Different from a Deduction?
Yes. Generally speaking, tax credits differ from tax deductions in that tax deductions allow the taxpayer to reduce the amount of their taxable income. While this is great, it really only lowers the taxable income, and therefore the tax liability by an appropriate percentage.
Tax credits, on the other hand, are applied after your tax has been calculated, meaning guaranteed savings up to the full amount of the credit.
This allows some mortgage lenders to get creative with first-time home buyer’s applications. Often, the lender will include the total amount of the tax credit as income, which helps the applicant look more favorable to underwriters.
How Much is the MCC Tax Credit?
The actual amount of the MCC tax credit will vary from state to state. The rates typically fall within a range of 15-30 percent. The Internal Revenue Service applies a $2,000 cap if the state’s limit falls north of 20 percent, however.
Putting this into an example, assume the amount of mortgage interest paid within the first year of owning a new home is $12,000. If the qualifying borrower lived in a state with a 20 percent MCC tax credit, then the total amount of the tax credit would be $2,400. Because the tax credit is greater than the IRS limit, only the capped amount of $2,000 could be claimed.
Qualifying for the MCC Program
Qualifying for the MCC program is relatively straightforward. The IRS sets the eligibility requirements, all of which a borrower must meet.
- The applicant must be a first-time home buyer with no ownership interest in any home for the past three years.
- The home must be within an eligible loan area and its price must not exceed the maximum allowed purchase price limits.
- The home must also be used as the home buyer’s primary residence, and not for commercial purposes.
- The home buyer cannot have a household income that exceeds income limits.
Refer to the local program administrator for additional eligibility requirements.
What Kind of Paperwork is Required for the MCC Tax Credit?
After selecting the appropriate MCC program that suits their needs, home buyers should work with an approved lender to facilitate the application and pay the non-refundable application fee. Approved lenders include banks, mortgage companies or brokers who are currently participating with the MCC program.
Tax Credit Tips
For specific tax guidance, buyers should seek the advice of a tax professional. In general terms, however, the MCC tax credit would be a tax savings that is claimed when a home buyer files his annual taxes.
There are ways to accrue these savings monthly by revising the W-4 to account for the tax savings; that said, those interested should seek the assistance of a tax adviser to do so.
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