The 2021 Guide to The Mortgage Credit Certificate Program

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:

• First-time Homebuyer: For some, you genuinely are buying your very first home. This means that you haven’t owned a house in the past — ever. It’s the program’s most literal definition.
  
  
• Newer Homebuyer: The program also includes those who haven’t owned a house in three or more years. So perhaps this isn’t your very first home, but it’s a newer endeavor for you. The philosophy behind this definition is that it’s more challenging to buy a new home without a current house’s capital. So after three years of no homeownership, the MCC program retakes effect.
  
  
• Homebuyer in a Targeted Area: Remember, this program aims to stimulate the economy. Therefore, each state predetermines targeted areas that would benefit from a housing boost. These areas might be up-and-coming residential districts, new builds, or even lower-income or declining neighborhoods requiring a surge of new residents. So, if you buy a home in these designated areas, you automatically qualify for the MCC tax credit and don’t have to fall into the definitions of a “first-time” or “newer” homebuyer.
  
  
• Active Military or Veteran: Another exception is active or veteran military. Again, you don’t have to fit the “first-time” and “newer” definitions if you’re either a military veteran or currently active in the military. You can buy in any area, even if it’s a second home, and still benefit from the tax credit.

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. 

The Paperwork

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:

• The Mortgage Credit Certificate: You must obtain your certificate before you buy your house. If you don’t, you cannot receive the MCC tax credit. So, as you’re searching for real estate agencies and home loan officers, ensure that they are MCC-friendly and help you with this process.
  
  
• Your MCC-Approved Home Loan: You need to work with professionals who understand the MCC program because your home loan must also receive official approval to move forward. Just ask your loan officer if they’re familiar with the program. Most are but be warned that it does take a bit more effort on their part, so some aren’t always too enthusiastic about it.
  
  
• Your MCC Percentage: You’ll receive the official percentage you’ll use to calculate your MCC tax credit after obtaining the certificate and approved loan. The rate usually ranges between 10-50% depending on your state. However, the exact number you’ll use also incorporates the amount of your home loan and the interest rate. It varies from state-to-state, but also person-to-person.
  
  
• The Mortgage-Interest Tax Form: When you file for your taxes, you’ll need to know the exact amount of interest you paid on your home loan to determine your credit. You’ll use the 1098 tax form, but every state names it slightly differently. For example, here in Pennsylvania, we use the PHFA 1098, which stands for the Pennsylvania Housing Finance Agency. If you’re in Texas, you’ll request the Texas Department of Housing and Community Affairs (TDHCA MCC) form. ​

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:

• Am I financially ready to buy a house?
  
• What is the housing market like now?
  
• Are there any market predictions to consider?
  

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:

• Start Your Search Early: Finding the right house with the right price will take longer with the current supply/demand issues. Starting your search now rather than in the typical spring/summer seasons will help you get a head start.
  
  
• Expand Your Horizons: It’s easy to fall into the dream home mentality, but try to widen your view a bit. Maybe your state has a few targeted areas that are desirable for you. Don’t rule them out.
  
  
• Do Your Research: This guide should help you understand the MCC tax credit in 2021, but don’t forget the other resources we mentioned above. There are many other federal and state-level programs that you can use in tandem with the MCC program. Many offer lower fixed interest rates and downpayment assistance.
  
  
• When Your Find it, Don’t Hesitate: Because the competition will be rather fierce this year, know what you’re looking for within your budget. And when you find it, pounce! Get started right away with applying for the Mortgage Credit Certificate so you can make the most out of your benefit.

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.