Homebuyers who have not owned a home in the past three years are eligible to claim the Mortgage Credit Certificate and receive a dollar-for-dollar reduction against their federal tax liability for 20% of their yearly mortgage interest payments.
The MCC program saves first-time buyers thousands of dollars off their tax bill over the life of the loan.
Let’s say John Buyer borrowed $200,000 to buy a home at an interest rate of 5.000%. Through the first year of the loan, John Buyer’s paid $10,000 worth of mortgage interest. The MCC program covers 20% of the mortgage interest, and that $2,000 goes to reducing taxable income.
The MCC works in tandem with the popular Mortgage Interest Deduction (MID) to increase homebuyer tax savings. Consider this example from the California Housing Finance Agency (CHFA):
As discussed, Joe Buyer receives a $2,000 MCC tax credit. Here is how that credit works with the MID reduction:
Using just the Mortgage Interest Deduction, Joe Buyer would owe $6,000 from income taxes. Using both the Mortgage Credit Certificate and the Mortgage Interest Deduction, Joe Buyer owes $4,300. This is an annual tax savings of $1,700.
The chart illustrates how MCC and MID work together. The $2,000 MCC credit is subtracted from the eligible Interest Deduction (20% off total income), which drops the deduction from $10,000 to $8,000 (to avoid “double counting”). The $2,000 MCC is subtracted from the final tax bill: a $1,700 savings.
Another perk: during mortgage qualification, the $1,700 tax savings can be added back into the buyer’s gross monthly income. Joe Buyer can now afford more home!
The MCC works with most popular loan programs, including conventional, FHA, VA, USDA, FHA, and ARM products.
MCC qualification may be restricted by location, buyer income, and purchase price.
Buyer qualifications:
Property qualifications:
The CHFA grants exemptions from income and property restrictions in low-income “targeted areas” to promote economic development. The sole “targeted area” in San Luis Obispo County is the 109.01 census tract, which is roughly to the east of Highway 1/Santa Rosa and North of Highway 101. Boulevard.
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