First-time home buyers in Michigan are getting an added incentive to buy a home, as the state is rejoining an old and often overlooked federal tax credit program.

As of July 13, first-time homebuyers in Michigan will once again be able to qualify for federal tax credits under the Mortgage Credit Certificate Program (MCCP). The program allows first-time homebuyers who meet certain qualifications to receive a tax credit for a portion of the interest on their home mortgage over the life of the loan.

In Michigan, that credit will be 20 percent of interest over the life of the loan for first-time homebuyers who meet income and sale price guidelines and other qualifications. The program gives first-time homebuyers an additional incentive for buying a home on top of the new $8,000 first-time homebuyer tax credit currently available.

Tax credit available in most states

The Mortgage Credit Certificate Program was authorized by Congress as part of the 1984 Tax Reform Act, but Michigan withdrew from the program about five years ago. Most other states have continued to participate in the program and have their own guidelines. About 50 percent of all mortgage certificates issued under the law are in California.

Many states require that properties purchased under the program be in "targeted" areas meeting certain income requirements. The Michigan program requires that qualifying properties be in communities where 70 percent of residents earn less than the state median income. Some other states, such as Ohio, do not limit the program to target areas but allow a bigger tax credit in those areas for persons meeting other requirements.

Qualifying homes under the new Michigan program include single-family homes, condos and some mobile homes with values up to $224,250. Unlike the new federal $8,000 tax credit, the MCCP program is not a one-time credit but a tax credit over the life of the loan. A homebuyer qualifying under the program gets a tax credit equal to 20 percent of the interest paid on the loan each year for the life of the loan.

Reduces tax bill each year

For a $200,000 loan at 5.5 percent, that would work out to a $2,200 tax credit in the first year of the loan, based on $11,000 in interest paid. The credit would get smaller each year as the principal is paid down and interest payments shrink. Unlike a tax deduction, the credit allows the homeowner to fully reduce his or her federal tax bill by the amount of the credit each year.

The credit cannot exceed the homeowner's federal income tax liability and, at least in the first year, could be reduced by the $8,000 tax credit. Each participating state implements the MCCP according to its own guidelines. In Texas, the credit is 30 percent of interest payments but is limited to $2,000 annually. Ohio extends the program to anyone who has not owned a home in three years, is a military veteran or purchases in an economically targeted area, and allows up to a 30 percent credit of Real-Estate Owned (foreclosed) properties.

More information on the Michigan program is available through the Michigan State Housing Development Authority. For information on MCCP programs in other states, contact the state housing authority, office of economic development or similar agency.

Published on July 6, 2009