Riverside County Mortgage Credit Cert Program

Published: June 10, 2009

RivCo EDA


Information o the Riverside County Mortgage Credit Certificate.


A Mortgage Credit Certificate (MCC) entitles qualified home buyers to reduce the amount of their federal income tax liability by an amount equal to a portion of the interest paid during the year on a home mortgage. This tax credit allows the buyer to qualify more easily for a loan by increasing the effective income of the buyer. The Riverside County MCC Program provides for a fifteen percent (15%) rate which can be applied to the interest paid on the mortgage loan. The borrower can claim a tax credit equal to 15% of the interest paid during the year. Since the borrowers taxes are being reduced by the amount of the credit, this increases the take-home pay by the amount of the credit. The buyer takes the remaining 85% interest as a deduction. When underwriting the loan, a lender takes this into consideration and the borrower is able to qualify for a larger loan than would otherwise be possible. The following table illustrates how a MCC increases a borrower’s “effective home buying power”:

Effective Home Buying Power With and Without an MCC

Without MCC

With MCC

First Mortgage Amount

$300,000

$300,000

Mortgage Interest Rate

7%

7%

Monthly Mortgage (Principal & Interest Only)

$1,996

$1,996

MCC Rate

N/A

15%

Monthly Credit Amount

N/A

$262.25

“Effective” Monthly Mortgage Payment

$1,996

$1,733.75

Annual Income Needed *

$85,542

$74,304

* Annual Income Needed is based on monthly Principal and Interest (P&I) not exceeding 28% of monthly income.

How does a Mortgage Credit Certificate actually work?

Assume the homebuyer bought a home with a mortgage amount of $300,000 with an interest rate of 7% with the monthly mortgage payment of $1,996 as illustrated in the previous page.

(1) The homebuyer would pay a total of $300,000 x 0.07= $21,000 of interest in the first year (Loan amount x interest rate).

(2) Because the homebuyer has a Mortgage Credit Certificate, the homebuyer could receive a federal income tax credit of $3,150 (15% x $21,000). If the homebuyer income tax liability is $3,150 or greater, the homebuyer will receive the full benefit of the MCC tax credit. If the amount of homebuyer tax credit exceeds the amount of his/her tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability.

(3) The remaining 85% of the mortgage interest or $17,850 ($21,000 less $3,150) qualifies as an itemized income tax deduction.

(4) To receive immediate benefit of the MCC tax credit, the homebuyer would file a revised W-4 withholding from with the homebuyer’s employer to reduce the amount of federal income tax withheld from his/her wages and increase homebuyer’s take home pay by $262 per month ($3,150/12 )

(5) By applying the increase in the homebuyer take home pay of $262 towards his monthly mortgage payment of $1,996, his effective monthly payment becomes $1,734 ($1,996 minus $262).

“Tax Credit” vs. “Tax Deduction”

A “tax credit” entitles a tax payer to subtract the amount of credit from their total federal tax bill whereas a “tax deduction” is subtracted from adjusted gross income before federal income taxes are computed.

Qualifying for the MCC Program

The three basic qualifications are:

(1) The borrower must be a first time Home Buyer;

(2) The borrowers annual income must fall within the program income limits; and

(3) The home being purchased must fall within the program purchase price limits. If the home is located in a Target Area, then the first-time buyer limitation does not apply and the income and cost limits are higher.


Last modified: June 10, 2009 at 9:20 am | Originally published: June 10, 2009 at 9:20 am
Printed: September 25, 2020