STATE HOUSING FINANCE AGENCIES
Mortgage Tax Credit Certicate (MCC)
OVERVIEW
State HFAs may also manage a program that provides
home purchasers with a signicant tax credit in connec-
tion with their home loans. The credit can be used in
a manner that assists people in making their monthly
payments more affordable (affecting underwriting) for
as long as the home remains their primary residence.
Participating bankers provide information to their
customers about the tax credit and apply to the HFA for
the certicate on the borrower’s behalf.
The Mortgage Tax Credit Certicate (MCC) program
was established by the Decit Reduction Act of 1984
and was modied by the Tax Reform Act of 1986.
8
Under the law, states can convert a portion of their
federal allocation of private activity bonds (PABs)
to MCC authority on a four-to-one basis. Mortgage
tax credit certicates can help lenders increase their
appeal to rst-time homebuyers and help more bor-
rowers qualify for homes by reducing their mortgage
payments. MCCs are not a loan product, but rather
a federal tax credit. MCCs are certicates issued by
HFAs that increase the federal tax benets of owning a
home and helps low- and moderate-income, rst-time
homebuyers offset a portion of the amount they owe in
mortgage interest.
An MCC is not a tax deduction, but rather it provides
a dollar-for-dollar tax credit to recipients to increase
housing payment affordability. In some cases, MCCs
can also help borrowers who might not otherwise
qualify for a loan by reducing their net monthly mort-
gage payment.
MCCs are issued directly to qualifying homebuyers
who are then entitled to take a nonrefundable fed-
eral tax credit equal to a specied percentage of the
interest paid on their mortgage loan each year. These
tax credits can be taken at the time the borrowers le
their tax returns. Alternatively, borrowers can amend
their W-4 tax withholding forms from their employer
to reduce the amount of federal income tax withheld
from their paychecks in order to receive the benet on
a monthly basis.
The tax credit percentages vary by state, but are
generally in the amount of 20 percent to 40 percent
of the total mortgage interest. The remaining interest
obligation may be deducted (by those who itemize
deductions) as a standard home mortgage interest
deduction. Regardless of the tax credit percentage
issued, the Internal Revenue Service caps the maxi-
mum tax credit that may be taken for any given year
at $2,000 for each MCC recipient. The MCC tax credit
remains in place for the life of the mortgage, so long
as the residence remains the borrower’s principal
residence.
The total MCC tax credit for each year cannot exceed
the recipient’s total federal income tax liability for that
year, after accounting for all other credits and deduc-
tions. Credits in excess of the current year tax liability
may be carried forward for use in the subsequent three
years. Therefore, it is important to consider the poten-
tial limitations of the credit for those homebuyers with
a minimal tax obligation.
Unlike down payment and closing cost assistance
programs, MCC programs generally do not restrict
the type of mortgage nancing with which they are
coupled. In particular, MCCs do not have to be com-
bined with an HFA rst-lien mortgage. First mortgages
originated in connection with MCCs but not originated
under an HFA rst-lien mortgage program are retained
by the lender (rather than sold to the HFA) and can be
held or sold at the discretion of the lender.
8
Tax Reform Act of 1986, Pub L. 99-514, 100 Stat. 2085, enacted October 22, 1986.
23 | FDIC | Affordable Mortgage Lending Guide
-
MCC EXAMPLE
Joe and Sylvia are purchasing their rst home. Their annual income is
$50,000. The mortgage interest that they will owe in the rst year of
owning their new home is $10,000.
Without an MCC, Joe and Sylvia would be able to deduct all of the
$10,000 in mortgage interest that they paid during year one, assum-
ing their other deductions are high enough that taking the standard
deduction is not a better tax strategy. However, if Joe and Sylvia get an
MCC for 20 percent of the interest on the mortgage, they will be able
to deduct $8,000 of their mortgage interest AND also receive a $2,000
dollar-for-dollar credit.
The tables below show an extremely simplied illustration of Joe and
Sylvia’s federal tax obligation with and without a mortgage tax credit
certicate.
9
It is important to note that if Joe and Silvia do not item-
ize deductions, they will get no tax benet from the mortgage without
the MCC.
WITHOUT AN MCC WITH AN MCC
Annual income $50,000
Mortgage interest
to deduct
$10,000
Taxable income
(assume 15% tax rate)
$40,000
Federal income tax $6,000
Total Income Tax Owed $6,000
Annual income $50,000
Mortgage interest
to deduct (80% total)
$8,000
Taxable income
(assume 15% tax rate)
$42,000
Federal income tax $6,300
Minus 20% MCC tax credit ($2,000)
Total Income Tax Owed $4,300
Net gain from MCC
(rst year)
$1,700
In this example, Joe and Sylvia would save $1,700 in federal taxes in the
rst year they received a mortgage tax credit. This annual credit could
also be added to their annual income for the purpose of qualifying for
a mortgage by amending their W-4 tax withholding forms, which may
boost their chances of loan approval. They would also continue receiv-
ing the annual MCC benet, albeit in a smaller amount as the interest
they pay on the mortgage declines, for as long as they keep their
mortgage.
POTENTIAL BENEFITS
Mortgage Tax Credits increase
borrowers’ payment affordability.
Mortgage Tax Credits
help lenders reach and
qualify more low- and moderate-
income borrowers.
Mortgage Tax Credits can be
coupled with most first mort
gage loans.
POTENTIAL CHALLENGES
The application, benefits, and
limitations of the Mortgage Tax
Credit Certificate program can be
difficult to explain to borrowers.
Borrowers may be subject to
recapture tax (although this is a
low risk).
State HFA MCC programs are
subject to funding availability
and may run out when the bond
funds allocated to MCCs are
expended.
9
This simplied illustration is intended to show how a tax credit can be applied and does not account for indi-
vidual nancial circumstances. For instance, the assumed 15 percent tax rate applied to the taxable income
does not account for personal exemptions or other deductions and credits that may apply. It is important to
analyze the nancial circumstances of each potential tax credit recipient in order to properly advise.
FDIC | Affordable Mortgage Lending Guide | 24
RECAPTURE TAX
A portion of the MCC benet is subject to recapture
by the Internal Revenue Service if a recipient meets all
three of the following conditions:
1. the borrower sells the home within nine years
of purchase;
2. the borrower earns signicantly more income than
when he/she bought the home;
10
and
3. the borrower has a gain from the sale of the home.
Only borrowers who meet all three criteria will be
subject to recapture. MCC borrowers are not subject to
recapture if they sell, give away, or dispose of the home
more than nine full years after closing. The maximum
amount of recapture, which is payable on the sale of
the home, is 6.25 percent of the original principal bal-
ance of the loan or 50 percent of the gain on the sale
of the home, whichever is less.
Most HFAs report that the majority of their pro-
gram recipients are not subject to tax recapture.
Nevertheless, many HFAs have Reimbursement
Recapture Tax programs that will reimburse borrowers
for any recapture tax incurred.
11
Number of HFAs that Offer MCCs
Of the 54 HFAs found in this Guide, 33 HFAs offer
mortgage tax credit certicates.
BANK ELIGIBILITY AND APPLICATION PROCESS
HFA MCC program approval requirements are gener-
ally more streamlined than the process to become an
approved rst mortgage and down payment assistance
approved lender. To use MCC programs, lenders need
to be approved by the insuring agency for which they
originate loans, i.e., the Federal Housing Administration
(FHA), the U.S. Department of Veterans Affairs (VA), the
U.S. Department of Agriculture’s Rural Housing Services
(RHS), Fannie Mae, or Freddie Mac and have an ofce
physically located in the state for which it is approved.
Minimum net asset requirements may apply. Generally,
lenders will need to sign a participation agreement that
outlines the lender’s responsibilities and requirements
associated with the program, such as submitting docu-
ments for approval to the HFA and record-keeping
responsibilities. Participation agreements generally
outline the documentation and borrower certication
requirements associated with the program. In many
cases, the HFAs charge an annual fee for lenders to
participate in the program.
BORROWER CRITERIA
Income and sales price limits: Income and sales price
limits are standard eligibility requirements for all MCC
programs. These limits vary by state.
First-time homebuyers: MCC programs are limited to
rst-time homebuyers (borrowers who have not had
an ownership interest in a principal residence in three
years). The rst-time homebuyer requirement is waived
for those borrowers purchasing a home in targeted
areas as dened by the U.S. Department of Housing
and Urban Affairs (HUD) at the census tract level or
designated as such by state governments, as well as for
active military and veterans.
Occupancy: Borrowers must use the home as their
principal/primary residence.
Homeownership counseling: Many HFA programs
require some form of pre-purchase homebuyer educa-
tion. These requirements vary by state.
PROGRAM CRITERIA
First loan purpose combined with MCCs: MCCs are
restricted to use in combination with purchase loans
(renances are not eligible). However, if a borrower cur-
rently has an MCC, and decides to renance into a new
mortgage, many programs allow the borrower to apply
to receive a new MCC issued against their renanced
mortgage.
10
A borrower will not meet this condition for recapture unless they earn the
maximum income limit that would have applied to their qualifying household
size at the time of purchase, compounded by 5 percent per year from the date
of purchase until the home is sold or transferred.
11
The following HFAs offer a recapture tax reimbursement program:
Connecticut, Idaho, Maine, Massachusetts, New York, North Dakota, Ohio, and
South Dakota. Check with your state HFA to determine whether they offer a
recapture tax reimbursement program.
25 | FDIC | Affordable Mortgage Lending Guide
First loan type with MCCs: Most xed-rate loan types
are eligible. Loans must be underwritten according to
FHA, VA, RHS, or conventional loan criteria as appropri-
ate and offered at prevailing market rates.
Combination with other HFA programs: Some states
allow the MCC program to be combined with other
HFA programs on the same transaction, such as allow-
ing a borrower to receive an HFA rst-lien mortgage
loan and down payment assistance and also receive
an MCC. Other states limit the degree to which HFA
subsidy programs can be combined.
HFA MCC fees: HFAs typically charge a one-time
MCC fee to the borrower, which is applied at the time
of closing. In some programs, this fee is waived or
reduced if the MCC is being issued in combination with
an HFA rst-lien mortgage product. Fees vary by state.
Lender MCC fees: Lender MCC fees are generally
allowed, but capped at a specic amount. Fee caps
vary by state.
Other lender fees: The loan origination and other
service-related fees may be capped on loans receiving
an MCC in some states.
Potential Benets
• Mortgage Tax Credits increase borrowers’ pay-
ment affordability.
• Mortgage Tax Credits help lenders reach and qual-
ify more low- and moderate-income borrowers.
• Mortgage Tax Credits can be coupled with most
rst mortgage loans.
Potential Challenges
• The application, benets, and limitations of the
Mortgage Tax Credit Certicate program can be
difcult to explain to borrowers.
• Borrowers may be subject to recapture tax
(although this is a low risk).
• State HFA MCC programs are subject to funding
availability and may run out when the bond funds
allocated to MCCs are expended.
A COMMUNITY BANKER CONVERSATION
Using the Mortgage Tax Credit
Certicate program
A banker from Kentucky helps her customers take advantage of the
Mortgage Tax Credit Certificate (MCC) program offered by the HFA. She
said she uses MCCs, which are certificates issued to qualifying homebuy-
ers that increase the federal tax benefits of owning a home. This helps
low- and moderate-income, first-time homebuyers offset a portion of
the amount they owe in mortgage interest by providing a tax credit that
can increase housing payment affordability. In some cases, an MCC may
also help borrowers qualify for a higher loan amount by increasing the
monthly income that can be used toward qualifying. “The MCC represents
an unclaimed pool of resources that even those of us who have been doing
this for a long time don’t always think about. People think it’s a lot of extra
work but it’s not; it’s just a few extra documents.”
RESOURCES
IRS MCC form
https://www.irs.gov/pub/irs-pdf/f8396.pdf
IRS Federal Recapture Tax information
https://www.irs.gov/instructions/i8828/ch01.html
See individual state HFA descriptions in Appendix A for
helpful mortgage tax credit certicate resources related
to the housing nance agency in each state.
FDIC | Affordable Mortgage Lending Guide | 26
