An MCC reduces the amount of federal income taxes owed, thus increasing the qualified homebuyer's after-tax income, enabling the homebuyer to more easily qualify for a loan and to make the monthly mortgage payments.
For example, a homebuyer with an 8.5% fixed rate, 30-year mortgage of $130,000, would make approximately $12,000 in interest payments during the first year of the mortgage. With a 20% MCC, a $2,400 credit (20% of $12,000) would be allowed as a tax credit against the applicant's federal income tax liability.
The MCC reduces the amount of federal income tax due. However, if the credit is greater than the borrower's tax liability, the IRS will not make a cash refund to the home owner. The unused portion of the credit can be carried forward for the next three tax years. The current year's credit is applied first; then "oldest" credit is used.
The borrower may adjust his or her federal income tax withheld (at work) and receive the benefit of the credit on a monthly basis. On receipt of the MCC, the home buyer can refile IRS Form W-4 with his or her employer reflecting the MCC credit and thereby increase his or her monthly take-home pay.
Return to the CDC Home Page (Index Page).
