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Mortgage Interest Tax Credit

What is a mortgage interest tax credit?

A mortgage interest tax credit allows you to reduce your federal income tax liability based on the amount of mortgage interest you pay. The credit is applied dollar-for-dollar to reduce your income tax liability.

These credit programs are available only for the purchase of a primary residence, and in some cases, you must be a first time homebuyer (not owned a home in the last 3 years) to qualify. The programs typically target low and moderate income homebuyers with limits on family income and home purchase price.

Many governmental entities offer these programs. The remainder of this page describes the Texas Mortgage Credit Program offered by the State of Texas. Give us a call if you need help finding other programs in your local area.

Who is eligible to receive the credit?

The program is open to those individuals and families who:

  • meet income requirements;
  • have not owned a home as primary residence in the past three (3) years;
  • meet the qualifying requirements of the mortgage loan; and
  • will use the home as their principal/primary residence.

Income limits vary by county and are based on a percentage of the county's median family income. The limits also vary by household size. Click here to view the limits. In this table, if your household size is 1 or 2 persons, use the 100% AMFI column. If your household size is 3 or more persons, use the 115% AMFI column. Your income is your current, gross, annual income. If you need help calculating your annual income, give us a call.

For certain Targeted and Disaster Areas, the first time homebuyer requirement is waived and increased income and home price limits apply. Targeted Areas are census tract in which 70% or more of the families have incomes that are 80% or less of the statewide median income or areas of chronic economic distress.

Veterans who served in active duty, were honorably discharged as evidenced by Form DD-214, and have not previously had a mortgage financed through a mortgage revenue bond program are exempt from the first time homebuyer requirement.

What types of properties qualify?

New and existing single family homes, townhouses, condominiums and manufactured housing (with certain restrictions) are eligible for the credit. Purchase price limits apply based on the county in which the property is located. You must occupy the property as your primary residence for the length of the credit.

How much tax credit can I receive?

The size of the annual tax credit is 30% of the annual interest paid on your mortgage loan. However, the maximum amount of the tax credit cannot exceed $2,000 per year, and the credit cannot be larger than your federal income tax liability. Credits in excess of the current year's tax liability may be carried forward for use in the subsequent three years.

The following shows the savings for a $121,000 mortgage (30-year fixed rate):

Mortgage Amount:$121,000.00
Interest Rate:6.0%
Total Interest Paid First year:$7,260.00
Tax Credit Amount:$2,178.00($2,000 max)

During the first year, you would be entitled to a tax credit of $2,000.00. Based upon such entitlement, you would be able to file a revised W-4 withholding form taking into consideration this tax credit and have approximately $167.00 per month in additional disposable income. (For a conventional or USDA Rural Development loan, the lender may take into account this additional disposal income to help you qualify for the loan. For an FHA loan, the lender may subtract the tax credit from your monthly mortgage payment to help you qualify.)

Additionally, if you file itemized returns, you may take a deduction for the mortgage interest paid each year, less an amount equal to the tax credit taken. (In the above example, the additional interest deduction would be $7,260.00 less $2,000.00, or $5,260.00).

How long does the credit last?

The tax credit is valid for the life of the loan as long as you occupy the property as your primary residence. Each year, the mortgage tax credit will be calculated as 30% of the mortgage interest paid that year.

What happens if I move before 10 years?

If you sell your home within nine years, you may be required to pay back a portion of the credit. This is called a "recapture tax." To be subject to the tax, you must:

  1. Sell your home within nine years;
  2. Have your income rise significantly (generally more than five percent per year) during that period; and
  3. Gain from the sale.

How do I apply for the credit?

All mortgage loan types are eligible. The mortgage loan, available through a network of participating lenders, must be underwritten according to FHA, VA, USDA/RHS, or conventional loan criteria and will be at prevailing market rates.

You must complete a homebuyer education course prior to loan closing. Click here for a list of certified homebuyer education providers in your area.

Are there any fees?

In addition to the regular closing costs associated with the loan, there is a $75 Commitment Fee (non refundable) and, upon closing, an Issuance Fee of 1% of the loan amount.