The Mortgage Credit Certificate Program is an excellent benefit to first-time homebuyers in any year. Still, in 2021, we already see housing market trends that make this program even more critical. In a nutshell, the MCC program delivers a tax credit to those who qualify (more on that below). For many homebuyers, this benefit can make or break their future house plans. And as the market shifts and interest rates rise amidst a pandemic, financial assistance is topping the list of homebuying priorities.
This guide will explore the Mortgage Credit Certificate (MCC) program, who qualifies for it, and how it can help first-time homebuyers in 2021. 2020 was a challenging year for many of us, impacting the economy in several different ways. We know that homebuying doesn’t stop, even in a pandemic. We’re here to help you understand and get the most out of the MCC tax credit this year.
What is the MCC Tax Credit?
The MCC tax credit results from the MCC program — a non-refundable tax incentive to help first-time homebuyers secure a house. Those who qualify receive the benefit every year throughout their home loan. The amount of your MCC tax credit is a percentage of the interest you pay on your mortgage. Keep in mind, however, that there’s a yearly cap of $2,000.
But, if you have a 30-year loan, that means you can save up to $60,000 on your home. Again, such considerable savings could be the reason why a first-time homebuyer can finally afford a house. The purpose of the program is to assist homebuyers financially and help stimulate the economy. The government wants us to buy homes!
Who Qualifies for the MCC Program?
The Mortgage Credit Certificate Program is available for those who qualify as a “first-time homeowner.” The Finance Housing Agency has officially defined this term. This organization uses four categories to determine who can receive the benefit. They include:
These categories make up those who qualify for the MCC tax credit. If you find that you fit any of these definitions, then congratulations! You, too, can receive this benefit when purchasing your home.
How to Calculate Your MCC Tax Credit
Although the Mortgage Credit Certificate Program is a federal initiative, every state manages its program individually. And, therefore, one state might implement a different approach than others. As a result, it’s common for those living in New York, for example, to receive more credit than their best friend in a different state, or vice versa.
If you’re curious about how your state runs the MCC program, check out a past blog post that dives a bit deeper into the differences. We also provide a link to a handy database that allows you to explore the credit where you live and search other helpful homebuyer programs.
It’s essential to explore your specific state because you’ll need those guidelines to determine how to calculate your credit. Remember, the amount you’ll receive each year is based on the interest you pay on your home loan. Your state sets the percentage to use.
First, you’ll need to gather some critical paperwork to file your taxes and calculate your credit. A helpful tip is to stay organized throughout the year and obtain the necessary paperwork as soon as possible. You’ll need:
Making the Calculation
Once you’ve collected all the important paperwork, you’re ready to start your calculation. Here’s the simple equation that you’ll use:
Annual Mortgage Interest Paid x MCC Percentage Rate
Let’s look at an example.
Let’s say your loan is $100,000 and your interest rate on your mortgage is 3%. That means you’ll pay a total of $2,876 on mortgage interest ($100,000 x 3%) in one year. You must now look at your MCC percentage rate and multiply it by the amount of mortgage you paid. So, let’s say you received a 50% rate. That means the total tax credit you’ll receive is $1,438 ($2,876 x 50%).
Loan Amount – $100,000
Interest Rate – 3.0%
Total Mortgage Interest Paid – $2,876 ($100,000 x 3%)
50% Rate of Mortgage Interest Paid – $1,438
Full Credit Earned – $1,438 ($2,876 x 50%)
Non-Refundable Tax Credit
There are a few other details to keep in mind. First, there’s an annual cap of $2,000. So even if your MCC tax credit is $2,500, you can only receive $2,000 of it. Second, this is a non-refundable tax credit. What does that mean?
A non-refundable tax credit is a benefit that doesn’t result in a refund for your taxes. Many of us get excited at tax time to receive our refund, but the MCC tax credit isn’t going to give you money. Instead, it reduces the amount of tax that you’ll owe. For example, let’s say you owe $1,000 on your taxes, but you received a non-refundable tax credit of $2,000. You can use it to pay off that $1,000 that you owe — but you don’t get the remaining $1,000 as a refund.
This caveat makes many people wonder if the MCC tax credit is worth it if you don’t tend to owe much on your taxes each year. The answer is still yes. With the MCC program, you can “carry forward” the credit into the following tax year. This strategy works well if you know you’ll have a higher tax year in the future. Still, if your tax burden is below your tax credit, it’s a great way to save money.
The 2020 Housing Market and 2021 Predictions
Let’s get back to 2021. We recently posted a couple of blogs addressing two common questions we receive: When is the best time to buy a house, and Should I buy a home in 2021? Both articles go into more depth than this guide, but these questions certainly impact how you can use the MCC tax credit in 2021.
The answers to these questions are not simple. Although we watch patterns and trends in the housing market, other factors swoop in (like a pandemic) and throw us off course. What you need to think about when answering these for yourself is:
Although these questions won’t change the logistics of how you’ll file your taxes and use the MCC tax credit, they will impact whether or not you should take the house-buying plunge.
Personal Finances in 2021
What matters most in your pursuit to buy a home — whether it’s your first home or not — is your personal finances. Unless you’re genuinely ready to buy a house, it’s best to wait. How do you know if you’re ready? You want to lower your financial obligation as much as possible, meaning you want a loan balance and interest rate that fits comfortably into your monthly and annual budgets.
You can secure affordable loans and interest rates by offering a higher down payment and ensuring that your credit score is top-notch. If you don’t have the savings or a good score, consider holding off while improving those two factors. When you are ready to buy a house, search for the best programs that can support you financially. The Mortgage Credit Certificate program can help make a home more affordable with its tax credit, but there are other programs out there, too.
2020 Housing Market Trends
I think we can all agree that 2020 was not your average year, and that’s even more true for the housing market. At the beginning of the year, the market ran its typical course. January and February usually remain slow as supply and demand lower. But at the start of the pandemic in late winter and early spring, we saw an unusual surge in demand. As people started to embrace the work-from-home trend, many city-dwellers set their sights on relocating to smaller and even more rural communities.
Supply was already growing, but demand snowballed. What we saw was an unexpected surge in housing prices in smaller communities while city prices started to drop. At the same time, we also saw record-low mortgage rates. Although these trends are now officially in the past, they will undoubtedly influence the housing market in 2021.
2021 Housing Market Predictions
The 2020 surge in housing demand isn’t going away anytime soon, which means those looking to buy a home this year must work with a lower supply. And when supply is low and demands high, you get higher prices. Some experts predict that the average cost will increase by up to 9%, and, unfortunately, we’ll see higher interest rates on top of it all.
If you’re a first-time homebuyer in 2021, you’ll need the MCC tax credit even more than in previous years. The savings the MCC program can offer you may be crucial to buying your first home.
Using the MCC Tax Credit in 2021
With high-price homes and increased interest rates on the horizon, 2021 homebuyers are prioritizing financial assistance programs. The housing situation will make it more difficult for first-time and low-income homebuyers to compete. For many, the Mortgage Credit Certificate Program and other state-level grants and assistance will be of the utmost importance.
If you want to buy in 2021, consider the following tips:
If you ever have any questions about the MCC tax credit or any tax inquiries, please reach out to us! We love helping people save money on their dream homes.
The MCC tax credit is a federal program to assist first-time homebuyers. However, each state runs its own particular program, and the benefits vary depending on where you live. In this article, we focus on the state of Texas. Here, residents rely on the Texas Department of Housing and Community Affairs (TDHCA MCC) for all the MCC mortgage credit certificate Texas details.
Qualifying for the MCC Tax Credit in Texas
If you live in Texas and fall into the Federal Housing Administration’s definition of a first-time homebuyer, then you can qualify for the MCC tax credit. Those who fall into that definition include:
Other restrictions include income and house pricing limits:
The above criteria determine general eligibility for the federal MCC program. However, as each state offers a different rate, calculating your tax credit depends on where you live. So, those living in Texas might receive a different credit than those in California or New York, for example.
Other Homebuyer Programs in Texas
According to the TDHCA MCC, in Texas, the state allows eligible residents to benefit from more than one homebuyer program. You can apply for the MCC mortgage credit certificate Texas as well as two other helpful assistance programs:
For the Texas Heroes program, eligibility extends to teachers, police officers, firefighters, EMS personnel, and corrections officers, in addition to veterans. An additional perk is that those who qualify for both the Heroes and the MCC programs save money on waived fees for the MCC tax credit.
Why is the MCC Mortgage Credit Certificate Texas Different Than Other States?
Let’s dive deeper into why each state runs its own separate programs. In 1984, the Deficit Reduction Act established the United States’ MCC program, which the Tax Reform Act modified in 1986. The program offers eligible homebuyers a non-refundable tax credit of up to $2,000 annually. Beneficiaries calculate the amount by using a percentage of the interest they paid on their mortgage, but each state’s rate is different.
State and local HFAs administer the MCC program, and it’s the HFA’s responsibility to set the benefit between 10-50%. Usually, each state has a smaller range, and the percentage that an individual homebuyer receives varies depending on the size of the home loan. For example, with the TDHCA MCC in Texas, those who receive the MCC tax credit claim between about 20%-30% of the interest they paid on their mortgage.
The most apparent reason why each state offers a different tax credit rate is that the cost of living varies across the country. Plus, every state works within different budget allocations.
How to Calculate Your MCC Tax Credit Rate in Texas
As mentioned, the TDHCA MCC in Texas allocates about a 20%-30% MCC tax credit rate. The rate you receive depends on the amount of your home loan. Keep in mind that you must calculate the benefit each year, so your percentage could change as your principal home loan decreases. And, remember that the maximum benefit is $2,000 annually. So if your rate gives you a credit of over $2,000, you can only claim the maximum on your taxes.
30-Year Loan Amount: $150,000
Interest Rate: 5.5%
Interest Paid: $8,250
Texas MCC Program Rate: 21.8%
Year-One Savings: $1,640
Let’s say you have a $150,000 loan with an interest rate of 5.5%. That means, in your first year, you’ll pay $8,250 in interest on your mortgage. With that loan amount and interest rate, you’d receive a 21.8% rate for the MCC program, meaning you’d receive a tax credit of $1,640.
Remember, the rate will change as your principal balance and the amount of interest you pay changes. By year five, you’ll have saved nearly $8,000 total. By the end of the 30 years, your total saving will be just over $31,000.
30-Year Loan Amount: $250,000
Interest Rate: 5.5%
Interest Paid: $13,750
Texas MCC Program Rate: 19.8%
Year-One Savings: $2,733
As your home loan increases, your percentage falls just slightly. For this example, by the fifth year, you will have saved just over $13,000. And by the end of your 30-year loan, your savings will be just over $52,000 in total. You can use this calculator for the MCC program in Texas to try out different scenarios.
The MCC Mortgage Credit Certificate Texas Will Save You Money
If you fit the MCC program’s eligibility criteria, you can save a lot of money on your home loan. You’ll receive thousands of dollars in tax credits throughout your home loan, reducing your federal income tax liability each year. And with the TDHCA MCC in Texas, you can combine these benefits with other helpful homebuyer programs.
If you want to get started on these saving, let us know — we’re here to help, and we serve residents in all 50 states.