Little Known Secret - Mortgage Credit Certificates!
scottsent August 12th, 2008
Mortgage Credit
Certificates
(And How They Benefit You!)
A little known lender secret is the Mortgage Credit Certificate. A seemingly obscure tool but when used properly can have dramatic benefits to the home buyer.
Most home owners already enjoy a tax benefit of owning a home - by taking the mortgage interest paid on their home loan as an itemized deduction on the federal income tax return.
The mortgage credit certificate, if you qualify, goes a step further. The MCC allows you to take a tax credit of 20% x mortgage interest paid on a single family residence.
To fully understand the benefit, you must understand the difference between a deduction and a credit.
A deduction reduces the amount of taxable income whereby the tax is calculated. For example, if you made $110,000 and you had $10,000 mortgage interest deducion, your net income would be $100,000. $100,000 x 30% tax rate = 30,000 tax you have to pay. (this is just a simple example, and excludes exemptions).
However, lets assume your tax is $33,000 ($110,000 x 30%) without the itemized deduction.
You get a credit of 20% of your mortgage interest, and get to take the rest of the mortgage interest as an itemized deduction. 20% x $10,000 = $2000. (The rest of your mortgage interest you can deduct is $8000 x 30% tax rate = $2400. $33,000-$2000-$2400 = $28,600
That’s a net tax savings of $1400 just by using the Mortgage Credit Certificate!!!
So, you might be wondering how this improves your financial situation allowing you to qualify for more home.
Here’s how: Since you know your tax will be less at the end of the year, you can revise your W-4 form (the form you give your employer which states how many exemptions you are taking, which effects how much is withheld from your paycheck).
So, you have less withholding which results in a higher take home pay for you, maybe by as much as a few hundred dollars! You can use that extra money to pay your mortgage and your other bills! It improves your DTI (Debt to income) ratio which allows you to qualify for more home!
The trick is that not everyone qualifies, and only a finite amount of MCC’s are issued annually.
To see the rules regarding who is eligible and who can qualify, please visit the site below:
http://www.shra.org/Content/Housing/HomeBuyer/SacMCC.htm