Pacific Credit Union Mortgage Rates, Refinance & Home Equity Loans

Dan rafter
Written by
Dan Rafter
Read Time: 5 minutes

If you're a first-time homebuyer, there's a good chance you've never heard of the Mortgage Credit Certificate Program. Many aspiring homeowners have not. And that's too bad, because it can save you some serious money - not just right now, but in the years to come as well.

If you're a first-time homebuyer, the Mortgage Credit Certificate Program can provide you with up to a $2,000 federal tax credit each year for as long as you have the mortgage. Enacted by Congress as part of the 1984 Tax Reform Act, it' aimed at middle- and lower-income families who haven't owned a home in the previous three years.

However, you need to live in a state where the credit is offered. And you need to apply for it at the time you take out the loan.

Up to $2,000 annual tax credit

Basically, the credit allows you to take a tax credit for part of the mortgage interest you pay each year. In many states, the credit is 20 percent of the mortgage interest you paid, up to a maximum of $2,000 a year. So if you bought a home with a $250,000 mortgage at 5 percent a year, your interest payments for the first year would total $12,416. Twenty percent of that is $2,483, so you could take the full credit of $2,000 the first year.

This is a tax credit, not a deduction - you get to subtract that $2,000 right off your tax bill due to the IRS. It's a nonrefundable credit, so you don't get the difference back if your federal tax obligation is less than the amount of your credit. However, you can stretch out any unused portion of the credit - the $483 left over in the example above - over the next three years. Of course, this won't make any difference until your annual credit drops below $2,000, but will come in handy then.

The credit isn't hard to qualify for - the limits on personal income and price of the home are actually fairly generous for a buyer assistance program. Many states allow annual incomes in excess of $70,000 for a single person or family of two, and limits on purchase price are similarly middle-class.

Not offered by all states

However, the program remains somewhat obscure. That's due in part to the fact that it's operating on the state and local level - and not all states offer the program. Funding for the program may also be limited in some states, or authorization for the program may be for only a limited time.

You also need to live in the home as your primary residence to continue to receive the credit each year. And if you sell the property after owning it less than nine years, you're be liable for a "recapture" of part of the credit, depending on how long you lived there, how much the property appreciated and your own income at the time of sale.

Rules and qualifications also vary considerably from state to state and even among differing counties and municipalities in the same state. New York state, for example, currently limits the program only to those purchasing in targeted areas, whereas most states do not.

Can reduce withholding, increase take-home pay

The size of the credit varies as well - although 20 percent of mortgage interest paid is common, it may run anywhere from 10 percent to 50 percent, although $2,000 is the maximum annual credit nationwide. Many homeowners choose to use the credit to reduce their W-4 withholding, effectively increasing their take-home pay.

The amount of the credit you receive does reduce the amount of mortgage interest you can claim as a deduction. However, since tax credits typically offer a much bigger savings than tax deductions do, you're usually better off taking the credit.

Currently, just over half of all states offer the program. In some states, it's administered through state housing agencies; in others, it may be offered through county or municipal housing authorities. Unfortunately, information on the program at the national level is limited. Your best bet is to contact your state or local housing authority to see if the Mortgage Credit Certificate is offered in your area. You can also do an Internet search using the name of your state and the phrase "Mortgage Credit Certificate Program."

Apply through authorized mortgage lender or broker

You apply for the credit through your mortgage lender or broker. However, not all lenders or brokers are authorized to offer the program. That's why you need to find out on your own if the program is available in your area - an unauthorized lender isn't likely to tell you about it.

Many states and local authorities charge application fees amounting to several hundred dollars for the program, although you'll typically recoup this the first year you claim the credit.

The Mortgage Credit Certificate Program isn't for all first-time homebuyers, particularly those who only plan on staying in the home for a few years. But if you expect to stay put for the next decade or so, and your state is one of those offering the program, it's an excellent deal.

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