What does a Mortgage Credit Certificate do?
It turns part of the mortgage interest you pay each year into a federal income tax credit.
IRS Publication 530 explains the mechanics. A state or local housing agency issues the certificate, generally only with a new mortgage to buy your main home. The certificate shows two numbers you’ll use every year: the certificate credit rate and the certified indebtedness amount. Only the interest on that certified amount counts toward the credit, and you claim it on IRS Form 8396 with your tax return.
The rate comes from the program. TSAHC, the Texas State Affordable Housing Corporation, says its certificate gives a credit equal to 15% of the mortgage interest you pay. As a simple illustration, if you paid $10,000 of qualifying interest in a year, a 15% rate would mean a $1,500 credit, before the limits below. Both the federal statute and TDHCA’s public notice for its program say that if a certificate’s rate is above 20%, the credit can’t be more than $2,000 a year.
Two limits keep it from being free money:
- It reduces your interest deduction. If you itemize, Publication 530 and the Form 8396 instructions both say you must reduce your home mortgage interest deduction by the credit amount figured on line 3 of Form 8396.
- It can’t exceed your tax. The credit is generally limited to your tax liability. Credit that’s cut back because of that tax limit can carry forward for up to 3 years under the statute and Publication 530.
That’s why the real value depends on your whole tax picture. Sit down with a tax preparer before you count on a number. Our first-time buyer guide puts this next to the other costs on your list.
Who qualifies for a Texas Mortgage Credit Certificate?
First-time buyers who fit the program’s limits, buying a home they’ll live in, through an approved lender. The details belong to the program, so treat this section as your question list.
First-time buyer. TSAHC defines a first-time buyer as someone who hasn’t owned a principal residence in the last three years. If you’re a veteran, or buying in a targeted area, ask the lender whether an exception to that rule applies to you. Our military relocation checklist covers the rest of a PCS purchase.
Income and price limits. TSAHC sets income requirements and purchase price limits for its program. Ask the lender for the current limits that apply to the exact address you’re buying and the program you’re using, not a number from a friend’s purchase across town.
This is where I’d slow down and check the math. A buyer who sits close to an income limit, or a home priced near the cap, can fall out of the program over a small change. Get the current limits in writing before you write an offer that depends on the credit.
Your main home. The certificate is for the home you’ll live in. IRS Publication 530 says an MCC is generally issued only with a new mortgage for the purchase of your main home. Ask the lender how soon after closing the program expects you to move in.
Approved lender. TSAHC says you must work with one of its approved lenders, who helps with the application. Ask whether your lender takes part in the program you want before you go further.
Why do you have to apply before your loan closes?
Because the certificate is tied to the new loan, and TSAHC won’t take an application after your loan has closed.
TSAHC says it plainly on its program page and in its FAQ: you must apply for the MCC before you close on your home loan, and you can’t apply after the loan has closed. IRS Publication 530 gives the same order of operations from the federal side. It says to contact the agency about getting an MCC before you get a mortgage and buy your home.
In practice, that means the conversation belongs at loan application, not at the closing table. If you’re already under contract on a New Braunfels home, ask your lender this week:
- Are you an approved lender for a Texas MCC program right now?
- Which program would issue it, and is it available with the loan I’m getting?
- What are the income and price limits for this county and this address?
- Does the program require a homebuyer education course, which courses count, and by when?
- What fee comes with the certificate, and when is it paid?
Write the answers down, and keep them with your contract dates. If the lender can’t run the certificate, decide early whether that matters enough to change lenders, and talk with your agent about how a change would fit your contract’s timeline. Our buyer closing costs guide helps you see where any program fee lands.
Which Texas programs offer one right now?
Two state agencies run programs. Publication 530 also points buyers to state or local agencies, so ask your lender whether any local issuer covers your address. Check availability before you plan around any of them.
TSAHC. TSAHC pairs its certificate with its own home loan programs, with or without down payment assistance. Its MCC page says the certificate can be used with its down payment assistance and No-DPA programs, and its Homes for Texas Heroes page says the No DPA option can be combined with the MCC. Both pages say eligible Texas Heroes can get the certificate free, and the Heroes page lists who counts. Ask a TSAHC lender whether the certificate is available with the loan you’re using.
TDHCA. The Texas Department of Housing and Community Affairs also runs a certificate program. Its homebuyer site lists the certificate and says supplies are limited. Ask a participating lender for TDHCA’s current rules.
Ask two questions, then: do I qualify, and is the certificate available with the loan I’m using?
When the certificate comes bundled with a program loan, compare the whole package, not the credit alone. Put the program loan’s rate, fees and assistance terms next to an outside loan’s numbers, then add what a tax preparer says the credit is worth to you each year. A credit that looks good on paper can still lose to a cheaper loan, and a slightly higher rate can still come out ahead once the credit is counted. Ask each lender for its numbers in writing so you can compare the same items side by side. Our post on first-time buyer down payments walks through the assistance side.
What can come back to bite you after closing?
The recapture rule, mostly. Publication 530 says that if you buy a home after 1990 using an MCC and sell it within 9 years, you may have to repay all or part of the benefit. The Form 8828 instructions describe the same recapture tax for a federally subsidized home disposed of during the first 9 years. Whether you’d owe anything depends on the details in those instructions, so ask a tax preparer before you sell or move out early.
That matters for New Braunfels buyers who expect to move again soon. A military buyer on a short assignment, or anyone who might sell in a few years, should run the recapture question with a tax preparer before closing, not after.
Before you close:
- Confirm the lender is approved for the MCC program you’re using.
- Get the county income and price limits for your address in writing.
- Ask whether a homebuyer education course is required, and finish any required course on the lender’s timeline.
- Ask a tax preparer what the credit is worth on your return, after the interest deduction reduction.
- Ask the same person how the 9-year recapture rule could apply if you sell early.
Then keep your certificate with your closing papers. You’ll need its rate and certified amount every year you claim the credit. You can sketch the payment side with the mortgage calculator while you wait on the lender’s answers.
