A mortgage interest credit is a tax deduction that can be filed on your federal income tax returns. According to the IRS (and Form 8223 that is filed for mortgage interest credit), you have to possess a Mortgage Credit Certificate (MCC). An MCC is deducted from your income so it makes additional money available to you that you can in turn apply to qualifying for a mortgage. Homebuyers looking to qualify for an MCC must fall into certain income requirements and home purchase price limitations.
First time homebuyers or homebuyers who have not purchased a primary residence in the past three years are eligible to apply for the Mortgage Credit Certificate, and ultimately receive the mortgage interest credit.
In order to receive the mortgage interest credit, the home being purchased and the mortgage used for financing have to meet certain requirements. The home purchase must be for a primary residence, so vacation homes and investment properties are excluded. The home must also be a single-family home and a 30-year term mortgage must be used for financing. The homebuyer is required to pay a $300 non-refundable fee to participate in the MCC program, must possess a sales contract that includes the legal description for the property and a copy of your federal income tax returns for the past three years.
Mortgage interest credit certificates that are issued by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Farmers Home Administration are not eligible for the mortgage interest credit. Homestead Staff Exemption Certificates are also excluded from the mortgage interest credit.
Both home purchases and refinances can qualify for the mortgage interest credit. The personal criteria, property criteria and mortgage criteria still have to be met in order to qualify for the credit. If, however, the mortgage you paid was to a private party, such as the case with a private mortgage or mortgage financing, then the mortgage interest credit cannot be claimed.
You have to calculate the amount of the mortgage interest credit you can claim each year. You can calculate the amount by multiplying the interest you were supposed to pay on your mortgage by the certificate rate listed on your MCC. You claim the mortgage interest credit using IRS Form 8396, which also must be filed on an annual basis for the tax year.