Thanks to the many city and county governments that offer Mortgage Credit Certificate (MCC) programs, first-time homebuyers are able to take advantage of a special federal income tax write-off. The credit reduces the amount of federal taxes paid by the buyer each year, if the buyer keeps the same loan and lives in the same house.
An MCC also makes it easier for eligible buyers to qualify for a mortgage loan. The lender can reduce the housing expense ratio - the percentage of gross monthly income applied toward housing expenses - by the amount of the tax savings. Normally, lenders reject loans if the housing expense ratio is too high.
Program requirements for MCCs vary, although most adhere to the following guidelines:
- The buyer must live in the home being purchased with an MCC-assisted mortgage.
- Total household income cannot exceed certain limits.
- The buyer cannot have owned a principal residence within the past three years. This restriction may be waived if a property is purchased within a certain targeted area.
- The purchase price must fall within an established limit.
A home provides many tax benefits, from the time you buy to the time you sell. The mortgage interest paid on a home loan up to $1 million for a primary residence or second home is tax deductible every year, as is the local property tax. Other mortgage costs - including late-payment charges and early-payment penalties - are also deductible. If you use a portion of your home for business purposes, you can take a depreciation deduction as well.
Many federal tax benefits are also available from local and state tax agencies. Contact your local tax agency for more information.