For Sale by Owner News and Articles
Mortgage Credit Certificates Improve Affordability
By Broderick Perkins
A 16-year old home-buying tool with a tax break that boosts your home-buying power can go a long way toward offsetting today's housing costs.
Mortgage Credit Certificates (MCCs), authorized by the 1984 Tax Reform Act, are designed to assist low- to moderate-income families and individuals buy their first home, when they might not otherwise be able to afford it.
And in some areas you don't have to be a first-time home buyer to cash in on the old program in today's ever-more-expensive housing market.
The national median existing-home price was $133,700 in November, 1999, up 3.3 percent from a year ago when the median price was $129,400, according to the National Association of Realtors. Mortgages cost more, too-- 8.06 percent for a 30-year, fixed rate loan as of December 31, 1999. A year earlier, rates were only 6.83 percent, according to Freddie Mac.
"Over the last month or so, the continuation of a strong economy has kept fears of inflation alive and will as we come into the new year," said Robert Van Order, chief economist for Freddie Mac.
How MCCs work
Fortunately, MCCs allow you to use a greater portion of your income to qualify for a mortgage.
With an MCC, depending upon where you live, up to 20 percent of the annual mortgage interest you pay to the lender is refunded to you as a federal tax credit.
As explained in Internal Revenue Service Publication 530, "Tax Information for First-Time Homeowners," the credit is subtracted, dollar for dollar, from the income tax owed.
The savings can be dramatic.
For example, if you paid $10,000 in interest, and your area's MCC tax credit rate is 20 percent, your tax credit would be $2,000. To claim the credit, you must complete IRS Form 8396 "Mortgage Interest Credit." The remaining 80 percent of the interest-- $8,000-- is taken as a typical mortgage interest deduction.
Because the tax credit is subtracted from the tax you owe, you can see the benefit immediately in your paycheck by adjusting your W-4 exemption status, and, in the example above, add more than $150 a month to cash available for a mortgage payment.
In many cases, lenders will qualify you for a loan based on the monthly mortgage payment minus the tax credit, enabling you to qualify for a larger loan and, as a result, a larger home.
Review your personal financial status to determine if the W-4 adjustment for a larger mortgage, reduced taxes or a possible tax refund is your best choice.
Who is eligible? Generally, MCC's are for first-time home buyers (anyone who has not owned a personal residence in the past three years) whose household income falls below the maximums set by your area's MCC program coordinator, typically 80 percent of your area's median income. The coordinator also sets the tax credit percentage (10 to 20 percent) and the purchase price limits for the home purchased in the area where you receive the MCC.
You needn't be a first-time home buyer if you use an MCC to purchase a home in designated "target area" transitional neighborhoods where the program wants to promote home ownership. In target areas, the allowable cost of homes purchased and income levels can be higher than in non-target areas.
An MCC is valid for the life of your mortgage, provided you remain in the home purchased with the MCC. If you move, you lose the MCC. If you sell your home within nine years of the purchase, you must repay some or all of the tax savings. The same is true if you sell your home at a gain or if your income increases above a level specified by your MCC coordinator.
Contact your MCC coordinator about obtaining an MCC before you get a mortgage and buy your home, because you must use a participating lender trained in the MCC process.
MCC coordinators are typically youy county housing department, housing authority or housing finance agency. A list of some coordinators is available on the Internet and by calling the Federal Information Center at (800)688-9889.
Broderick Perkins, has been a consumer journalist for 20 years. Experienced in print, electronic, and consulting journalism, he is chief executive editor of San Jose, CA-based, DeadlineNews.Com, an editorial content and consulting firm.
© Copyright 2000 by Broderick Perkins. All Rights Reserved.