What is a mortgage credit certificate?
If you qualify for a VA loan, you may qualify for a mortgage certificate (MCC). If you are, take advantage of the offer.
A mortgage credit certificate could give you a worthwhile tax break. And, unlike other mortgage tax cuts, you can take advantage of an MCC even if you’re taking the standard deduction rather than itemizing your taxes. That could mean direct savings on your federal tax bill.
How mortgage credit certificates work
A mortgage credit certificate is a federal tax credit for homeowners that can help them save on their yearly tax bills. The amount you could save on your taxes with an MCC varies by state, but the IRS caps the maximum mortgage credit certificate at $2,000 per year.
When you have a mortgage credit certificate you can submit an IRS form 8396 each tax year for as long as your certificate is valid. And you can do that even if you don’t itemize your deductions and instead take the standard deduction. Check out the guidance on the IRS’s website.
Your MCC is tied to your mortgage something to be mindful of if you refinance, move out, or sell the home. You will want to talk to your local VA lender to find out if you continue to qualify.
Unlike mortgage tax deductions, which may reduce your taxable income — and only if you itemize your taxes — a mortgage credit certificate is a dollar-for-dollar reduction in your tax bill. And you don’t need to itemize your deductions to take advantage of it. So homeowners who qualify for the maximum MCC amount could save up to $2,000 per year on their taxes.
A MCC, allows certain home buyers to lessen the overall amount owed on their federal taxes. The amount is based on the mortgage interest paid during the year through the monthly payments. In essence, by dropping the amount of tax owed, the person’s overall income is basically higher. The higher income gives people a better chance to qualify for a mortgage.
The following example will demonstrate how the credit can help. This chart assumes that the monthly mortgage payment (principal and interest only) equals 28% of the borrower’s monthly income.
|With Mortgage Credit Certificate
|Without Mortgage Credit Certificate
|Amount of Loan
|Principal and Interest monthly mortgage amount
|Rate for mortgage credit
|Monthly calculated amount of credit
|Monthly mortgage amount after credit
|Necessary yearly income to qualify for mortgage
The home buyer has signed a contract to purchase a property for the price of $300,000. The fixed interest rate is 5% and the monthly payment is $1,610.
- In the first year of the mortgage, the homeowner would pay $15,000 just in interest. ($300,000 x 0.05 = $15,000)
- The rate for the mortgage credit certificate is 25%. Normally, the amount of interest multiplied by the rate would be $3,750 ($15,000 x 0.25 = $3,750). However, there is a maximum yearly amount of $2,000. Thus the amount of $166 monthly in the chart above.
- In the event that the homeowner owes $2,000 or more in federal income taxes, the tax amount will be reduced by the $2,000 credit. On the other hand, if the tax amount is less than $2,000 then the homeowner is allowed to use the extra amount and carry it to the next tax year, up to 3 years.
- If the homeowner itemizes their tax deductions, they can use $13,000 of their mortgage interest as a line item deduction ($15,000 minus $2,000 cap equals $13,000)
- With this information in hand, it would be in the homeowner’s best interest to change their W-4 withholdings in order to lower the federal income tax amount by $250. The homeowner could then apply this extra amount towards their mortgage payment.
A tax credit will reduce the actual tax amount owed by the borrower. For example, using the figures above, if a homeowner owes $3,500 on their taxes before calculating their mortgage credit certificate; the $2,000 credit would reduce the tax amount to $1,500.
Contrarily, a tax deduction reduces a person’s adjusted gross income. The tax amount is then calculated on the reduced gross income.
Who is eligible?
The borrower must meet income limits, the transaction must meet purchase price limits and the borrower must be a first-time home buyer unless they are buying a home in a WHEDA target area or are a military veteran. Also, the mortgaged property must remain an owner-occupied primary residence. To be eligible for the program, veterans must meet the conditions of Wisconsin Statutes, Chapter 45.
Veterans are strongly encouraged to apply for these loans. This loan program demonstrates WHEDA’s continued commitment to the men and women who have served our country. To find out more contact an MRP who will connect you to a local VA lender in your area.
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