As the drive to create more affordable housing strengthens, more and more state and local housing authorities are issuing mortgage tax credit certificates (MCCs). These help qualified low- and moderate-income buyers offset a portion of the interest they pay every year for their home loans.
The MCC program was established by the Deficit Reduction Act of 1984 and modified by the Tax Reform Act of 1986. After peaking in 1997, the number of tax returns claiming the credit dipped by more than 50 percent, then started to take off again in 2007.
The maximum tax credit allowable each year is $2,000 -- maybe not much, in the grand scheme of things. But it is a dollar-for-dollar reduction against your federal tax liability, as opposed to a typical deduction, so it comes directly off your bottom line.
Better yet, it can be layered onto other government programs that also seek to make housing more affordable. And lenders sometimes add the credit to your income, so you might qualify to purchase a bit more home.
However, MCCs "are not a silver bullet," says Rob Chrane of DownPaymentResource.com, a website that lists some 2,400 different programs nationwide. "They won't cure all ills, but they can help move the needle significantly."
According to the latest figures from the National Council of State Housing Agencies (NCSHA), state authorities more than tripled their issuances of MCCs between 2012 and 2014. And that doesn't include the numerous local housing finance authorities, which also issue MCCs. In Texas, DownPaymentResource counts 19 local issuers, besides the state agency. In California, 12 local issuers offer MCCs.
"We've seen a large increase in issuances," says Greg Zagorski of the NCSHA. "We're seeing a lot more interest in the program as states seek to rebuild their single-family lending programs."
Currently, 34 states issue the credit certificates, and the District of Columbia introduced MCCs in the nation's capital just last month. (The states that do not yet offer MCCs are Alaska, Connecticut, Georgia, Kansas, Louisiana, Maine, Massachusetts, Nebraska, New Jersey, New Mexico, New York, North Dakota, Oregon, Tennessee, Utah and West Virginia.)
Here are the program's basics:
Each year, your mortgage tax credit will be calculated based on a percentage of the total interest paid on the loan that year. The percentage varies depending on the program, but it ranges from 20 percent to 50 percent. According to DownPaymentResource, 40 percent is typical.
The certificate remains in effect for the term of the mortgage, as long as the underlying property remains your principal residence. You can adjust your withholding on your W-4 to take the credit into account, so you will have a bit more take-home pay listed. And your lender can use the added income to approve a somewhat larger loan.
Homebuyer education is required, though. You must take a course from a counseling agency approved by the Department of Housing and Urban Development prior to closing.
The program is open to individuals and families who meet certain income and purchase requirements. These rules are different for each issuing authority. In Maryland, for example, the maximum sales price ranges from $255,000 in rural areas to $525,000 in Baltimore proper. Income limits also vary in the Old Line State, based on household size, from $89,000 in rural areas to $152,000 in urban areas.
Across the Potomac River in Virginia, meanwhile, the max sales prices range from $251,900 in rural spots to $500,000 in urban core areas. The max income ranges from $121,900 for one- and two-person households to $142,300 for households with three to eight people. In Virginia, moreover, there is a significant federal recapture tax if you sell the house within nine years and realize a significant increase in income.
Also, you must use the house as your primary residence and cannot have owned your main home for the previous three years. Veterans are exempt from the three-year rule.
Again, the maximum amount of the credit cannot exceed $2,000 in a single year. And the credit cannot be any larger than your federal tax liability after all other credits and deductions have been taken into account.
But credits in excess of your current-year tax liability can be carried over for use in subsequent years.
According to NCSHA data for 2013, the national average loan amount of a borrower who used a mortgage credit certificate was $156,632. The average borrower income was $52,862. About 1 in 4 MCCs were claimed by minorities, and nearly 2 out of every 5 were claimed by female heads-of-household.