A Mortgage Credit Certificate is a first time home buyer benefit available in DC, VA and MD. You may be eligible if you have not owned real estate in the past three years.
While I am not a tax advisor, I will explain the benefits and costs of applying for an MCC.
For home owners who live in their property as a principal residence, they will be able to save on their income taxes by deducting from their income the property taxes and interest they pay on their loan. So on a sample $400,000 loan at a 5% interest rate, the home owner will pay over $20,000 in a given year in interest and perhaps $4000 in property taxes. So if that home owner makes $100,000 now they actually pay income taxes on $100,000-$20,000-$4,000=$76,000.
This is an enormous tax savings and if this person is in the 28% tax bracket they will save $24,000 * .28 =$6720 in income tax.
The MCC will provide an additional credit on top of the savings the home owner is already entitled to. You will earn this credit for the time period you live in the property. The credit is 20% of the interest you pay. So if you pay $20,000 in interest in a given year, you’ll get $20,000 * .2 = $4000 in additional tax savings. A credit is better than a deduction since it’s a reduction in your tax obligation, as opposed to a reduction in your taxable income. The remaining $16,000 in interest and $4,000 in taxes can still be deducted from your taxable income using the above formula. So it’s the $4000 from the MCC plus ($20,000 * .28 =$5,600) equals a total income tax savings of $9,600 for the MCC holder instead of just the $6,720 everyone is entitled to.
It’s for this reason that MCCs are very popular. Applying for them does require additional documentation and time and requires fees. In DC expect to pay additional fees of about $1,075-$2,225. The total fees for the MCC & the DC open doors processing fee is $1350. The total fees if you want an MCC but are not getting a loan for DC open doors is $2225. In MD the additional fees are $1395-$1,800. In VA there is no cost to the MCC. In most cases, the fees are made up in the first year of ownership.
You will need to document that your household income doesn’t exceed the program income caps (In DC it’s $132,360 for 1-2 family members or $154,420 for 3+) and in MD it varies by county, and in VA here are the caps. You will also need to provide 3 years of income tax returns.
To calculate your MCC savings, use this link. Maryland has an annual savings cap of $2,000. DC and VA have no cap.
While the DC Open Doors program does allow non-occupant co-signers who help someone else qualify, when you utilize a non-occupant co-signer you are not eligible for the MCC.
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