14 Big Pros and Cons of Mortgage Credit Certificates

A mortgage credit certificate is a document provided by the originating mortgage lender to a borrower that directly converts to a portion of the interest paid into a non-refundable tax credit. These certificates can be issued by a loan broker or the lender, but they are typically available to low-income buyers unless there are extenuating circumstances which apply. This process helps first-time homebuyers qualify for a loan because it reduces the tax liabilities below what they would pay otherwise.

Borrowers can receive a tax credit for each dollar they pay for a portion of their mortgage interest on their house each year. The maximum tax credit is dictated through legislation that, but it is usually around $2,000 annually. Homeowners must go through a formula calculation to determine the amount that they can receive.

You can also qualify for a mortgage credit certificate if you are not a first-time home buyer if you make the purchase of a home in an area that has an economically distressed designation. That’s why it is imperative to take a look at the biggest pros and cons of this process.

List of the Pros of Mortgage Credit Certificates

1. Every state offers a program which allows for a mortgage credit certificate.
Every state in the United States offers access to a federal program for first-time home buyers or those who are purchasing a home in an economically distressed area that makes this tax credit available. One example of this structure is the NCHFA that is available in North Carolina. There are qualifications that you must meet to get into the program, but it can help you to save up to $2,000 per year in federal taxes if you qualify.

2. You can receive a significant tax credit with this program.
First-time home buyers qualify for a tax credit that is equal to 30% of the mortgage interest that you pay each year when you own your home. If you purchased a new construction house, then a mortgage credit certificate qualifies you for up to 50%. You are capped at a maximum of $2,000 for your savings, but this credit is available for every year that you are a qualifying homeowner.

That means you can save $10,000 on your taxes after spending five years in your home. If you stay there for 10 years, then you will save $20,000. There is no long-term cap to this program.

3. It is relatively easy to qualify as a first-time home buyer with this program.
A first-time home buyer is defined by a mortgage credit certificate as someone who has not owned a primary residence in which they have lived for the past 36 months. Veterans even have a one-time exception to this rule. If you are divorced or are renting out another home, you can still qualify for this program. The only mandate is that you have not lived on the property where you have a current mortgage in the past three years.

4. You might qualify for a mortgage that does not require a down payment.
Some lenders might offer a mortgage credit certificate with a lending product that does not require you to pay a down payment to get into a new home. You might be asked to roll the down payment amount into the mortgage, and you will need to pay for private mortgage insurance to guard against the default in this situation. There may also be opportunities for grants, low-interest loans, or to defer payments for a specific period so that your financial situation can stabilize.

5. Your credit score does not need to be perfect for you to qualify.
Most states will let you qualify for a mortgage credit certificate with a credit score that is below 700. If you are applying for this program in North Carolina, then the minimum FICO score is just 640. There are some financial restrictions that may apply, such as the amount of liquid assets that you have. Some programs will not allow you to have more than $5,000 in your bank account if you want to take advantage of this first-time homebuyer program.

There are also income restrictions that you will need to consider for a program like this. As a general rule of thumb in the United States, if you make more than $86,000 and have a family of four, then you may not qualify for a mortgage credit certificate. You will want to speak with your lender about any of the specific rules they have for qualification.

6. You know that your home is going to meet your needs.
Because a mortgage credit certificate is usually treated as a first-time home buyer arrangement program, there are specific health and safety stipulations that the property must me to qualify. That means you know that it must be in good condition if an offer for this program is extended to you. It must also be free of any safety hazards, such as lead-based paint.

Even if you do not qualify for a mortgage credit certificate because of the condition of the property, you might still be able to get a beneficial loan through the FHA with their 203K rehabilitation lending product.

7. You can get pre-approved in no time at all for this program.
The speed of mortgage origination is much higher today than it has been in past years. Some lenders will provide you with a preapproval for your lending product in as little as three minutes. That includes the likelihood of your approval into a program like the one a mortgage credit certificate offers.

Most home buyers benefit from working with a local mortgage originator when they want to take advantage of a program like this. Some national providers can give you access to this tax savings as well. Make sure that you read all of the reviews for the lenders that you are considering to reduce the risk of a headache later on.

List of the Cons of Mortgage Credit Certificates

1. There are times when you might need to pay the tax credit back.
Although this disadvantage of a mortgage credit certificate is rare, it is possible for some home buyers to owe a fee back to the federal government when they decide to refinance or sell their home. That means you would need to pay back the tax credit which you received. Most homeowners are not responsible for more than $2,000 if their income and other requirements qualify for this re-capturing fee, but it could be significantly higher.

You will want to speak with your tax advisor if your plan involves moving to a different home within five years of your mortgage origination. These are the stipulations which cause the fee to apply.

  • You are selling the house within nine years of purchasing it.
  • You are going to realize a profit from the sale of the property.
  • There is a significant gain in your household income with in this time frame.

2. There is a maximum sales price to consider with a mortgage credit certificate.
The maximum sales price for a home that qualifies under the mortgage credit certificate program in the United States is $250,000. It does not matter what county you live in with this disadvantage. That means if you live in a high-income area with the average home price being above $300,000, you may not qualify for this program.

There are also maximum income limits that you must consider, but these are based upon the household income levels for the county where you intend to purchase the home. Every person who will be living with you must report their income as part of the application process. You must even count any Social Security benefits or SSDI to see if you qualify.

3. The home must remain your primary residence to continue qualifying.
If you applied for and are approved for a mortgage credit certificate, then the tax credit that you receive each year is based on the fact that the residence is your primary home. If you decide to move away from the property for any reason and start living somewhere else, then you will no longer qualify for this program – even if your income situation stays the same. That is why it may not be the best choice to pursue this option if your living situation might require you to move within the next 10 years.

4. You must have your mortgage underwritten in a specific way.
A mortgage credit certification must be underwritten according to the rules of the state and county where you intend to purchase a property. The mortgage must follow the rules according to the loan criteria of the FHA, USDA, RHS, or VA depending upon the various circumstances that surround your property.

Your lender may also be required to make you go through a pre-purchase educational course prior to the closing of your mortgage so that you understand what your rights and responsibilities are with a mortgage credit certificate. If you do not complete the course, then you may not qualify for this tax credit.

5. There is vagueness in the definition of a “significant” change of income.
Because there is the re-capturing fee to consider with a mortgage credit certificate, it is important to know what the definition of the word “significant” is when you are trying to sell your home before the nine-year deadline. As a general rule of thumb, this issue applies if you lost your job, received a substantial raise, or started a business that provides the equivalent of a full-time income.

If you are unsure about your financial situation with this disadvantage, then the best thing to do is to reach out to your lender to see what they have to say about your circumstances.

6. You will still need to pay PMI until your load reaches a specific level.
FHA loans allow you to purchase a property with as little as 3.5% down. You can also apply for a mortgage credit certificate with this option if your income qualifies. Your lender will want to put on PMI (private mortgage insurance) in this situation unless you are able to put 20% down on the home.

The private mortgage insurance is going to stay on the property until you reach an 80% loan to value ratio. There are also more closing costs and fees to consider in this situation. That’s why it may be financially better to continue renting until you have your debts paid down and plenty of cash saved a way for a down payment.

7. There may not be a qualifying lender in your area.
Many of the state programs specifically authorize brokers to issue a mortgage credit certificate. Because the emphasis on this program is based on the county where are you intend to live, there are very few national providers is in the United States who can provide access to this program. If you plan to live in a rural area, then there might not be a qualifying lender in your area who can accept you into the local program.

You will still have access to the other first-time buyer opportunities that are available in the area, including the option for a reduced down payment. You will just not receive the same level of tax savings that other home buyers would have in your situation.

Conclusion of the Pros and Cons of Mortgage Credit Certificates

If you are tired of renting, then purchasing a house is your only option. A mortgage credit certificate can ease the initial financial burden of this process in the United States by giving you a tax credit of up to $2,000 on the mortgage interest that you pay for the property.

Like many first-time buyer programs, there are several restrictions and strings attached to this program. The certificate might be a perfect fit for some households, but it can also be the wrong fit for others.

The biggest pros and cons of a mortgage credit certificate reflect some of the requirements that you must meet to qualify for the program. You will need to have a down payment ready for your lender, a high enough credit score to qualify for a mortgage, and potentially manage a higher payment than what you have in a rental property. If you can handle these changes, then the financial benefits of this program are worth a closer look.

Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.