TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS
2006 MORTGAGE CREDIT CERTIFICATE PROGRAM
Texas Mortgage Credit Certificate Program
Texas Department of Housing and Community Affairs (TDHCA) recently created its 2006 Mortgage Credit Certificate (MCC) Program for the residents of Texas, to help make ownership of new and existing homes more affordable for individuals and families of low and moderate income.
The MCC Program authorized by Congress in 1984, provides financial assistance to first-time homebuyers for the purchase of single-family homes, townhomes, condominiums and manufactured homes. The TDHCA MCC tax credit reduces the federal income taxes of qualified borrowers purchasing qualified homes. The size of the annual tax credit from the MCC Program will be 35% of the annual interest paid on the mortgage loan (not to exceed $2,000 per year).
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MCC Application Process
Borrowers are encouraged to go through the "normal home buying process" in which they would contact a real estate agent or broker to search for a home.
Applicants that may be eligible for participation in the Program should apply for MCCs in conjunction with their normal mortgage loan applications for conventional, FHA, VA, or other home mortgages at the mortgage lending institution of their choice, participating in the Program, before applying for an MCC. The Participating Lender or Broker is trained to answer the borrower's questions about the MCC Program.
The Lender will determine if the borrower is eligible for an MCC, based on the preliminary indications of income, residence purchase price, prior home ownership, location of the residence to be purchased and potential tax liability.
If the borrower meets the MCC Guidelines, the Lender directs the borrower to sign the initial application documents, which the Lender will forward to the Program Administrator, along with the borrower's non-refundable application fee of $75.
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MCC ELigibility
In order to be eligible for a Mortgage Credit Certificate, applicant(s) must meet the MCC federal requirements……
Maximum Income Levels
The maximum household income level is capped at 100% (for a family of 1-2 persons) and 115% (for a family of 3 or more persons) of the median family income for the area of Texas in which the property is located. Household income is the annualized gross income (i.e., current monthly gross income multiplied by 12). Liquid assets are not considered in determining gross income. Click on the income limits chart to find the maximum income limits for your area and family size.
First-Time Homebuyers
A "first-time homebuyer" is a person who has not had an ownership interest in a "principal residence" within the past three years. Applicants who have cosigned a loan for someone else within the last three years, but never occupied the property as their "principal residence" are still eligible first-time buyers. Landlords who have owned one or more rental properties, but who never occupied any owned dwelling as a primary residence are also eligible. A divorced spouse must wait three years from the date that the property last owned by the couple ceased to be the couple's principal residence before he/she can qualify as a "first-time homebuyer".
Please note - An MCC cannot be issued to a homebuyer who is:
- Not a first-time homebuyer (except in Targeted Areas)
- A first-time homebuyer who plans on assuming the seller's existing mortgage
- A first-time homebuyer who is refinancing an existing mortgage
Maximum Purchase Price Limits
The maximum purchase price includes all amounts paid, either in cash or in kind, by the purchaser (or by a related party for the benefit of the purchaser), real estate commissions paid by the buyer, the cost of any upgrades with respect to any new construction, and the capitalized value of any ground lease (if applicable). Click on the purchase price chart to find the applicable purchase price limit for properties in Texas.
Types of Property
New and previously owned single-family residences, condominiums and townhomes are all acceptable. Multiple family units such as apartment complexes, duplexes, or fourplexes are not eligible. Manufactured homes are also eligible; however, they must meet federal MCC guidelines.
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Tax Credit vs. Tax Deduction
A mortgage interest deduction differs from a mortgage tax credit in a number of ways:
All homebuyers, regardless of income, may take a mortgage interest deduction, whereas mortgage tax credits are available only to holders of MCCs.
A deduction reduces the amount of income that is taxed, and a credit reduces the amount of income tax. A "tax deduction" is subtracted from your adjusted gross income before you calculate your federal income taxes. A "tax credit" entitles the taxpayer to subtract the amount of the credit (dollar-for-dollar) from the total federal income tax bill.
Credits are generally more valuable to taxpayers because they constitute a greater percentage of the overall tax bill.
How the MCC Benefits the Homebuyer
MCCs are issued directly to qualifying Applicants who are then able each year to take a tax credit (not to exceed $2,000) equal to a specified percentage of the interest paid on their mortgages. The Mortgage Credit Certificate rate for the 2006 Program is 35%. Thus, an Applicant with an $95,000 mortgage would realize the following savings:
MCC Example
Mortgage Amount $95,000
Interest Rate 6%
Total interest paid first year 57,000
Mortgage Credit Certificate rate x .35
Tax Credit: $ 1,995
(Based on a 30-year mortgage with equal monthly installments of principal and interest)
During the first year of the Program, this Applicant would be entitled to a tax credit of $1,995. Based upon such an entitlement, he/she would be able to file in advance a revised W-4 withholding form taking into consideration this tax credit and have approximately $166 per month in additional disposable income. Additionally, taxpayers who file itemized returns may take a deduction for their mortgage interest paid each year, less an amount equal to the tax credit taken. (In the above example, the additional interest deduction would be $5,700 less $1,995, or $3,705.)
The benefit to the homeowner cannot exceed the amount of federal taxes paid each year after other credits and deductions have been taken into account. Any unused MCC tax credit can be carried forward up to three years to be applied against future income tax liability.
Please note that the MCC staff members are not tax attorneys and will not provide tax advice. If you have a specific tax question, you are encouraged to seek the advice of your tax consultant.
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Participating Lenders
In order to obtain a Mortgage Credit Certificate, a Borrower MUST use a Participating Lender.
A participating Lender means a financial institution, which has met all of the requirements, established by TDHCA to participate in the MCC Program, and has entered into a "Lender Participation Agreement" with TDHCA.
A Participating Lender can be a bank, trust company, savings bank, national banking association, savings and loan association, building and loan association, mortgage banker, mortgage company, credit union, life insurance company, or other financial institution that actively provides service or otherwise aids in the financing of mortgages on single family residential housing located within the State, or is a holding company of any of the foregoing.
Only a Participating Lender may submit an MCC application for a homebuyer.
Please click on the current list of MCC approved lenders to find a lender in your area.
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Recapture Tax
All MCC Recipients should be aware of a potential "Recapture Tax".
Under certain circumstances, homeowners, who have received the benefit of a tax credit against federal income taxes from an MCC, may be subject to federal recapture tax. The payment of federal recapture tax occurs at the time a borrower's property is sold, only if all three of the following conditions apply:
- Borrowers sell their home within the first nine years of ownership, and
- There is a capital gain on the sale of the home, and
- The borrower's household income at the time of the sale exceeds applicable federal recapture tax threshold income limits.
Please consult a tax preparer for further clarification.
IRS Form 8828 is used to report the recapture tax on the mortgage subsidy.
Instructions for Form 8828 (Recapture of Federal Subsidy)
IRS Form 8828 - Recapture of Federal Subsidy
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Manufactured Homes
Under the Mortgage Credit Certificate Program, a manufactured home is eligible housing for an MCC if it meets the following guidelines:
- The manufactured home must be permanently affixed to real property, and
- The home must have a minimum of 400 square feet of living space, and
- The home must have a minimum width of 102 inches.
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Tax Information
Please keep in mind that the staff of Texas Department of Housing and Community Affairs and the staff of Housing Administrators, Inc. are not tax consultants and will not calculate the amount of any tax credit or tax payable to the IRS. The forms below are provided as a courtesy of Housing Administrators. MCC holders are advised to consult a tax consulting professional with specific tax questions.
- IRS Form 8396, Mortgage Interest Credit
- IRS Publication 530 - Tax Information for First Time Homebuyers
- IRS Form 8828, Recapture Tax Form
- IRS Recapture Tax Instructions - Form 8828
Further MCC and Reissued MCC Tax Information can be found online IRS Website.
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