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First-Time Homebuyers: Supercharge Your Tax Benefit

The Mortgage Credit Certificate (MCC) program can offer a significant tax benefit to qualified first-time homebuyers. However, there are not always enough funds available from the agency that issues the MCC in Hawaii (Hawaii Housing Finance Development Corporation or HHFDC).

If you're a considering purchasing your first home (or your first home in more than three years), there are currently HHFDC funds available on a first-come, first-served basis.

The last time that funds were available was March 2019. Once this round of funding is exhausted, it could be several months before the program is available again. Don't miss your chance to obtain this beneficial tax credit!

What is an MCC?

The MCC is a program authorized by Congress in 1984 to reduce the Federal income tax paid by a homebuyer who meets the State household income and purchase price limits, as well as other Federal eligibility requirements. Once approved for MCC, homebuyers can receive a dollar-for-dollar tax credit for 20 percent of the annual mortgage interest paid and still be able to deduct the other 80 percent of mortgage interest as an itemized deduction from taxable income.

The mortgage credit each year depends on the amount of interest paid on the mortgage, but cannot exceed the homeowner's annual Federal tax liability. Any unused credit can be carried forward though for a maximum of 3 years to reduce future tax liability.

How does the MCC program work?

Let's assume that you purchased a home with a $400,000 loan at 4.25% interest rate for a 30-year fixed loan...

  • The principal and interest payment on this loan would be $1,967 per month, or $16,870 per year. 
  • With the MCC, you could receive a dollar-for-dollar tax credit on 20% of that total mortgage interest ($3,374), assuming your Federal tax liability is at least equal to that amount (if this amount exceeds your total tax liability, then the excess can be carried forward for up to 3 years).
  • This $3,374 tax credit works out to a monthly savings of $281. 
  • Tip: To take advantage of that savings right away, adjust the withholding on your W4 form so that $281 less per month is withheld.
  • This monthly tax savings of $281 effectively reduces your $1,967 monthly principal and interest payment to $1,686 per month.
  • Tip: You can still deduct the remaining 80% ($13,496) of the mortgage interest paid as an itemized deduction from your taxable income. 

How do I qualify for an MCC?

Here are the basic requirements to qualify for an MCC:

  • You must be a first-time homebuyer - that is, you have not held ownership interest in a primary residence in the last 3 years. You can still qualify if you owned and sold a primary residence more than 3 year ago, or even if you currently own an investment property, you could qualify as long as you did not reside in that home as your primary residence in the last 3 years. 
  • The home must be your primary residence. You can only claim the MCC benefit as long as you reside in the home. If you move to another primary residence, the MCC is no longer valid and the credit can no longer be claimed - even if you move back into the home at a later date. 
  • You must use a brand-new loan to purchase your home with the MCC. You cannot use MCC to assume or refinance an existing loan. 
  • You must apply for an MCC through approved lenders who participate in the MCC Program (list of Hawaii-approved lenders).
  • The Hawaii Housing Finance Development Corporation (HHFDC) issues MCCs in Hawaii, and they require a $25 application fee along with a $400 processing fee. The $25 fee must be paid with a cashier's check or money order at the time of application. The $400 fee is typically collected at closing in conjunction with the approval of the MCC. 

Every state that offers the MCC program has different household income and purchase price limits that are required to qualify for the MCC. Once you qualify for the MCC program at the time of purchase, you do not have to re-qualify to take advantage of the tax credit as long as you reside in the home as your primary residence. 

Oahu 2019 income and purchase price limits to qualify for MCC: 

  • The maximum purchase price for 2019 is $663,882 for Oahu (income and purchase price limits for Maui, Kauai and Hawaii Counties).
  • The MCC tax credit is considered to be a subsidy by the Federal government. As such, you may be subject to a recapture tax if ALL three of the following conditions apply: 1) You sell your home within 9 years of purchase; 2) You profit from the sale; 3) Your income increases above a specific level on a "recapture tax income table." 
  • The MCC program can be approved for your home purchase in combination with Conventional, VA, FHA and USDA loans. Your lender will establish their own requirements to qualify for the mortgage loan, such as loan type, loan term, down payment, credit, income, assets and mortgage insurance (PMI) and closing costs, including points, fees and prepaid items. 

 Make sure to verify that your selected lender is approved to participate in the MCC program and can qualify you for the program as part of your home purchase.

Confused? Ask your lender how to apply for the MCC program at the time of your loan pre-approval. That way, the lender will have time to obtain everything they need to start preparing your MCC submission package once you have an accepted purchase agreement.

Don't have a lender? Your REALTOR® can refer you to trusted, local lenders.