If you have a friend or family member who is thinking of buying a house or condo in Maryland or DC, I wanted to let you know about two great programs that give first-time home buyers (and other qualified buyers) a substantial credit that can be applied to their annual tax bill.
You probably know about the mortgage interest deduction that most homeowners already claim on their federal taxes. The Maryland HomeCredit Program is different, and provides a federal tax credit to first-time home buyers. A tax deduction reduces the homeowner’s “taxable income”. In contrast, a tax credit, such as the Maryland HomeCredit, provides the homeowner with a reduction in their actual federal tax liability.
This federal tax credit is equal to 25% of the value of mortgage interest paid each year (up to $2000), for the life of the loan (i.e. until payoff, sale, refinance or transfer). In other words, $2000 of your annual interest payments will be refunded. Also this doesn’t exclude you from taking a deduction for the remainder of the mortgage interest paid that year.
Calculating the value:
Let’s say your taxable income is $60,000, your annual mortgage interest paid is $8000, and you are in the 25% tax bracket.
60,000 – 8000 = 52,000 x 25% = $13,000 taxes owed
Standard deduction with MD HomeCredit
60,000 – 6000 = 54,000 x 25% = 13,500 – $2000 credit = $11,500 taxes owed
In this example, you get a $1500 savings the first year and can continue receiving the credit until the loan is paid off.
- There are income limits and home purchase price limits and they vary by county.
- You cannot have owned a home during the past three (3) years, UNLESS you are purchasing in a Targeted Area – there are several in Montgomery and Prince George’s Counties.
- The home you purchase must be your primary residence.
DCHFA Mortgage Credit Certificate (MCC) provides a federal income tax credit similar to the Maryland HomeCredit program.
The primary difference is that the DC MCC is a 20% tax credit of the mortgage interest paid annually (versus 25% in MD) and there is no annual cap on the amount (versus $2000 cap in MD).
The remaining mortgage interest the borrower paid remains as a tax deduction. The credit can can be claimed every year for the life of the loan; as long as the borrower continues to occupy the property as their principle residence.
Calculating the value:
On a $280,000 mortgage with an interest rate of 4.5%, the borrower may pay $12,422 in interest the first year. The MCC would allow you to take a federal income tax credit of $2,484 ($12,422 x 20%) for that year. Please note that you can still claim a mortgage interest deduction for the remaining 80% of the mortgage interest you paid.
The borrower does not have to wait until tax time to reap the benefits of an MCC! Once you calculate the annual credit amount, the borrower can revise Form W-4 with their employer to reduce the amount of federal taxes withheld from their pay check
The minimum credit score to qualify for the MCC is 660 for an FHA; 680 for FICO. There are also income and sales price limits similar to the MD HomeCredit program and you must not have owned in the last 2 years.
I think these programs are extraordinary opportunities for new home-buyers and I’m happy to help connect any interested friends or family to a participating mortgage lender.