A Mortgage Credit Certificate is a first time home buyer benefit available in DC and VA (as of June 2020, MCCs are no longer available in MD). You may be eligible if you have not owned real estate in the past three years.
FEB 2021 update: The DC Housing Finance Agency has announced that the MCC may temporarily no longer be available to reserve beginning 2/19/21. To reserve an MCC, we will need a ratified purchase contract and place the reservation request prior to availability being exhausted. The agency has stated that new reservations are expected to be available again, but do not know for how long the program will be temporarily closed.
While I am not a tax advisor, I will explain the benefits and costs of applying for an MCC.
MCCs are often combined with down payment assistance programs, but do not have to be. It is potentially possible to acquire an MCC no matter what loan program you are utilizing. Most applicants getting an MCC are utilizing the MMP in Maryland or the DC Open Doors program in DC or VHDA in VA. An MCC will greatly increase the tax benefits of home ownership.
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 on a DC home 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 $6720.
In VA the credit is 10% of your mortgage interest.
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 $950-$1,950. In VA there is no cost to the MCC if financing through the VHDA loan program, or it’s $1,000 if you are getting a loan not through the program.
You will need to document that your household income doesn’t exceed the program income caps (In DC it’s $151,200 for 1-2 family members or $176,400 for 3+), and in VA here are the caps.
There are also sales price and property type restrictions, in DC the sales price cap is $565,300. You cannot get an MCC on a co-operative, for example. Here is more info on MMP in Maryland or the DC Open Doors or VHDA.
To calculate your MCC savings, if you are also already pre-approved, ask me to forward you an excel spreadsheet which is an easy calculator.
Applying with a co-signer is not possible if purchasing an MCC. Co-signers.
In all 3 jurisdictions you can claim the MCC for as long as you have the mortgage from the purchase, and you continue to live in the property. If you refinance your mortgage, you lose the MCC.
Questions? Reach out to me at [email protected] or 240 479 7658