How Does the Mortgage Credit Certificate Work?

Recently I was asked how Mortgage Credit Certificates work in comparison to the Mortgage Interest Deduction. The answer is they work together for low income individuals. States and local governments may elect to grant revocable mortgage credit certificates to low-income individuals. According to Colorado Housing and Finance Authority (CHFA) people in Larimer County with a 2 person household can earn $74,900 and purchase a home for $281,200 and be eligible to receive the credit certificate. In Weld County a 2 person household can earn $85,200 and purchase a home for $417,000 and be eligible to receive the credit certificate. Other qualifications for the certificate are a credit score of 580, the home must be used as a principal residence and the home owner cannot have owned a home as a primary residence in the past 3 years (certain refinances of subprime mortgages also qualify). Certificate rates can vary from 10% to 50%. If the certificate rate exceeds 20% then the maximum credit allowed is limited to $2,000. According to CHFA the certificate rate in Colorado is 20%.

Let’s take a look at how an example would work. Let’s say a 2 person household in Colorado qualified for a 20% Mortgage Credit Certificate in order to purchase their home. At the end of 2011 they received a mortgage interest statement stating they paid $8,000 in mortgage interest for the year. They may take a $1,600 (8,000 x 20%) mortgage credit on Form 8396 and $6,400 (8,000 – 1,600) mortgage interest on their Schedule A. The $6,400 of mortgage interest reduces their adjusted gross income in order to get to their taxable income (the amount of income that your tax rate is applied to) and the $1,600 reduces the amount of tax you owe. So if you owed $5,000 in taxes after the credit of $1,600 is applied you now owe $3,400. A pretty cool deal!

However there are a few things you need to be aware of:

• If you sell within 9 years of buying a home using a Mortgage Credit Certificate, you will have to repay some of the credit.

• Any unused credit can currently be carried forward 3 years. But the carry forward provision is tied to the Bush tax credits so you need to be aware that the carry forward feature may disappear.