Mortgage Credit Certificate (MCC) – First Time Home Buyer Program

I am thrilled to be able to offer the Mortgage Credit Certificate Program for eligible first time home buyers.  This Federal tax credit program is available to first time home buyers & buyers who have not owned a  home as their principal residence in the past three years & military veterans.  I am an big fan of this program because I was able to use this same program when I bought my first home.  Income limits for this program are based on total household income – not just the income of the borrower(s) – and the income limits vary from county to county.  Household income is the total gross annual income for all residents intending to live in the home, age 18 or older (except full-time dependent students).

The current maximum purchase price (updated for 2023) for this program is $385,000.  There is a one time fee of $475 to the NCHFA which is paid when your loan closes.  And then you can save up to $2,000 a year on your IRS 1040 Federal Tax Return for every year you live in your home.

Here is how the MCC Tax Credit – which is applied to your IRS 1040 –  is determined:

1. If you buy an existing home, your MCC allows you to claim a federal tax credit for 30% of the interest you pay per year – up to a maximum of $2,000 per year – for every year you live in your home. The remaining 70% of the interest you pay is still available as a tax deduction for mortgage interest paid.
2. If you purchase a newly built home (new construction), you can claim a federal tax credit for 50% of the interest you pay – also capped at a maximum of $2000 per year – for every year you live in the home. The remaining 50% of the interest you pay is still available as a tax deduction for mortgage interest paid.

In order to receive a Mortgage Credit Certificate when you close your purchase mortgage, we will submit your MCC application directly for approval from the NC Housing Finance Agency once our underwriters have approved your loan.

Note: the benefit of this program is a reduction in your Federal income tax liability.  So if your income is tax-exempt, you won’t benefit.

What are the requirements:

a) You must be a First Time Home Buyer, a military veteran, or buy a home in a targeted census tract.
b) You must be a permanent legal resident of the United States.
c) You must occupy the home as your primary residence within 60 days of closing.
e) You must provide income documentation for all income earners who will reside in the home for the previous 3 years.
d) Household Income – not just borrower income – must meet county specific income limits.  See the chart below for our local triangle counties:

https://www.nchfa.com/home-buyers/income-limits

Here’s an example of how this tax credit works. On a $180,000 mortgage with an interest rate of 4.75%, assuming your 1st mortgage payment was made on January 1st (which means you would make 12 mortgage payments over the tax year) you would pay $9433 in interest in the first year. 30% of $9433 is $2830, which exceeds the limit of $2000, so you would be limited to a tax credit of $2000 for year. But remember – you can still claim a mortgage interest deduction for the remaining 70% of the mortgage interest you paid.  So in this example, you’d have a tax credit of $2000 and a tax deduction of $7433.

In the example above, over the first 10 years of ownership you would save $20,000 in federal taxes via this IRS tax credit, and again, you would still be able to claim an interest deduction on the remaining 70 percent of the interest you paid.

If you do receive an MCC, your Federal taxes will be lower than normal.  Once you calculate your anticipated annual tax credit, you can revise your payroll withholding with your W-4 form, which will reduce the amount of federal taxes your employer withholds from your regular paychecks.  This is allowed because you are not required to have more taxes withheld than you will be required to pay.   In the example above, if you qualified for the maximum $2000, you could have your monthly federal payroll tax withholding reduced by $2000/12 = $167.  That means you could take home an additional $167 per month, rather than wait for the $2000 tax credit when you filed your taxes the following April 15th.

Here is a link to the IRS form you  will need to complete to accompany your IRS 1040:

https://www.irs.gov/pub/irs-pdf/f8396.pdf

What you should know about recapture:
As a recent seminar I completed with the NCHFA, I was informed that in the history of the Mortgage Credit Certificate program in North Carolina, they were aware with only a few instances where there was a recapture of any kind.  The Mortgage Credit Certificate program is intended to assist buyers with low and moderate incomes.

You should know that there is a federal tax recapture provision for borrowers who meet these three criteria:

1. Sell the home within nine years, AND
2. Realize a profit when they sell, AND
3. Have a significant gain in household income – specifically this gain must be more than 5% yearly above the income limits in effect  FOR EACH YEAR the home is owned.
   Again – all three criteria must be met for a recapture tax to be a possibility. 

For the limited number of homeowners who have to pay recapture, the tax guidelines are structured to help limit the impact. The maximum amount of recapture is 6.25% of the original loan amount or 50% of the gain from the  sale, whichever is less. And gain from the home’s sale is calculated after deducting future real estate agent’s  commissions, legal fees and closing costs.

Again, the NCHFA is aware of only a few instances where there was a recapture of any kind.