one-If you’ve worked with your state’s Housing Finance Agency (HFA), you might have heard about Mortgage Credit Certificate (MCC) tax credits. But even if you’ve worked with your HFA, you may never have had a reason to learn about MCCs, what they are, who qualifies for them, and how much money a qualified borrower could save.
In this post, we’ll answer all these questions and more about the MCC tax credit.
What is an MCC tax credit?
MCC tax credits are certificates issued by HFAs and increase the federal tax benefits of owning a home. They provide dollar-for-dollar tax credits to borrowers to increase the housing payment affordability on those loans.
This tax credit is issued directly to the borrower either when they file their federal tax return or when they amend their W-4 tax withholding forms from their employer to reduce the amount of federal income withheld from their paychecks. With the latter method, the borrower reaps the tax credit on a monthly rather than annual basis.
Note that not all HFAs offer an MCC, so check with your state’s housing authority.
How do borrowers qualify to get an MCC tax credit?
To qualify for an MCC tax credit, borrowers must be low-to-moderate income first-time homebuyers Also, the property they are purchasing must be used as their primary residence.
It is worth noting that this primary residence designation may be waived for borrowers purchasing a home in targeted areas as defined by HUD at the census tract level or designed as such by state governments. Active military and veterans may also have exemptions. Check with your state HFA to understand their rules.
How much do borrowers get back?
This varies by state, but the maximum MCC tax credit per year is $2,000. Also, the credit cannot exceed the borrower’s total federal income tax liability for that year.
Apart from getting that up to $2,000 back per year, borrowers get to claim that tax credit every year until they sell the home, or the property is no longer used as the borrower’s primary residence.
What other things should I keep in mind with the MCC tax credit?
Unlike down payment and closing cost assistance programs, MCC programs generally do not restrict
the type of mortgage financing with which they are coupled. In particular, MCCs do not have to be combined with an HFA first-lien mortgage. First mortgages originated in connection with MCCs but not originated under an HFA first-lien mortgage program are retained by the lender (rather than sold to the HFA) and can be held or sold at the discretion of the lender.
When providing a loan to a borrower that has an MCC tax credit on it, something you should remind them of is that the borrower must take action to claim the credit on their tax return. It is not the responsibility of the administering HFA to submit the paperwork to receive the credit each year.
Another thing is that not all HFAs administer MCC tax credits. And if your HFA administers a credit, they may or may not allow the use of the MCC as qualifying income. Depending on the state, your HFA might also charge a one-time fee to cover the administrative costs of the tax credit program.
One more thing is that HFAs can sometimes run out of MCC funds, but that’s not a common occurrence.
Some cautions for you and your borrowers
An MCC may be subject to a recapture tax by the IRS if a recipient meets all three of the following conditions:
- Borrower sells the home within nine years of purchase
- Borrower earns significantly more income than when they bought the home
- Borrower has a gain from the sale of the home
If your borrower ends up meeting all these criteria, there is a maximum recapture amount that can be collected. This amount is either 6.25% of the original balance on the loan or 50% of the gain on the sale of the home, whichever is less. This recapture tax would be due upon the sale of the home.
Most HFAs report that the majority of their program recipients are not subject to tax recapture. Some states even have reimbursement recapture tax programs that reimburse borrowers for any recapture tax incurred.
MCC tax credits benefit borrowers
Ultimately, HFA loans and their subsequent MCC tax credits help low-to-moderate income borrowers, many of whom are first-time homebuyers.
By understanding more about the MCC tax credit and HFA loans, you can help more borrowers find the right loan that works for their situation. Your state’s HFA will be the best resource for you – contact them to find out if they offer an MCC tax credit. If not, you can still learn more about their available programs and how to leverage them to help more borrowers find homes.
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