What Is a Mortgage Interest Credit? How to Claim It

The mortgage interest credit is a federal tax credit that lets qualifying homeowners subtract a percentage of the mortgage interest they paid during the year directly from the federal income tax they owe. It comes from Internal Revenue Code Section 25, and unlike the mortgage interest deduction, it reduces tax dollar-for-dollar rather than lowering taxable income. To use it, you need a Mortgage Credit Certificate (MCC) issued by a state or local housing finance agency before your loan closes, and you claim the credit each year on IRS Form 8396 for as long as the loan is in place and the home remains your principal residence.¹

How the Credit Is Calculated

Your annual credit equals the certificate credit rate printed on your MCC multiplied by the mortgage interest you paid that year on the certified indebtedness amount. The rate is set by the issuing agency and can fall anywhere between 10% and 50%.¹ In practice, most agencies set rates between 20% and 40%.²

One cap matters. If your certificate credit rate is above 20%, the credit is limited to $2,000 in any year. A rate of 20% or below carries no dollar cap beyond your actual tax liability.¹ So if you paid $8,000 in interest at a 25% rate, the math lands on $2,000, right at the ceiling. Pay $12,000 in interest at that same rate and the raw figure is $3,000, but you still take home $2,000.

The credit is also nonrefundable. It can zero out your federal tax, but any amount beyond what you owe won’t be paid back to you as a refund in that year.

Who Qualifies

The credit rides on the MCC, and the eligibility rules for a certificate are strict. You generally must meet all of the following:

First-time homebuyer status, meaning no ownership of a principal residence in the three years before the purchase.²
Household income at or below the area median for your location. Exact figures vary by program and family size; each state agency publishes its own.
A purchase price within the agency’s maximum limits.
Use of the home as your primary residence. Investment properties and vacation homes are out, and the credit only continues as long as you actually live there.²

The first-time buyer rule is waived if you purchase in a federally designated targeted area. Those are qualified census tracts where 70% or more of families earn 80% or less of the statewide median income, or areas of chronic economic distress that the state designates and the federal government approves.³ Veterans may also be exempt from the first-time buyer requirement depending on the state program.

Getting the Certificate Before Closing

You apply for an MCC through your state or local housing finance agency, and the timing rule is absolute. You have to apply before or at loan closing. There is no way to obtain a certificate after the mortgage has already closed.² This is the single biggest reason otherwise eligible buyers miss out.

You’ll also typically need a lender that participates in the MCC program. Not every lender does, so check with your state housing finance agency for an approved list before you start shopping. The certificate covers purchase loans only; a standalone refinance is not eligible on its own.² Administrative fees typically run a few hundred dollars, though the exact amount varies by agency.

Once issued, the certificate lists two numbers you’ll use every year at tax time: the certified indebtedness amount (the loan balance the credit applies to) and the certificate credit rate.

How to Claim It Each Year on Your Return

You claim the credit on IRS Form 8396. You’ll need two documents to fill it out: your MCC and Form 1098, which your lender sends every January showing the mortgage interest you paid during the prior year.⁴

Line 1 of Form 8396 asks for interest paid on the certified indebtedness. If your total loan balance is larger than the certified amount on the certificate, you allocate only the portion of interest that matches. Line 2 is your certificate credit rate. The form then applies the $2,000 ceiling if it applies to you and checks the result against your tax liability.⁵

The final credit amount moves from Form 8396 to Schedule 3 (Form 1040), line 6g, and from there into your main return as a nonrefundable credit.⁶ E-filing handles the transfer automatically.

Reduce Your Mortgage Interest Deduction by the Credit Amount

If you also itemize and deduct mortgage interest on Schedule A, you have to reduce that deduction by the amount of credit you claimed. The same interest dollars can’t produce both a full deduction and a full credit.⁷ The rest of your interest still deducts normally, so for many MCC holders with a rate of 20% or less, a substantial deduction survives alongside the credit.

Unused Credit Carries Forward Three Years

If your credit for the year is larger than the tax you owe, the leftover portion carries forward to the next three tax years or until you use it, whichever happens first.⁵ This is a federal rule written into the statute, not a state variation.¹

Note one exception. If your credit was cut down by the $2,000 cap because your rate is above 20%, the piece above $2,000 does not carry over. Only the portion limited by your tax liability qualifies for carryforward.⁵ Part II of Form 8396 handles that calculation.

What Happens If You Refinance

Refinancing does not automatically end the credit, but you can’t keep using the old certificate on a new loan. The issuing agency has to reissue the MCC. The reissued certificate applies to the same property, its certified indebtedness cannot exceed the remaining balance of the original certified indebtedness, and the credit rate cannot go up.⁸

There’s also a ceiling on the annual credit under the reissued certificate: it cannot produce a larger yearly credit than the original certificate would have for that same year, measured against the interest scheduled on the original loan at the original rate.⁸ Contact your housing finance agency before closing on the refinance. Skip the reissuance step and the credit ends.

Recapture Tax If You Sell Within Nine Years

Selling or otherwise disposing of the home within nine years of purchase can trigger a recapture tax that returns part of the federal subsidy. It applies to homes purchased with MCC-backed loans originated after December 31, 1990.⁹

The recapture is the product of three figures:

A federally subsidized amount equal to 6.25% of the highest principal balance of the subsidized loan.
A holding period percentage that rises 20%, 40%, 60%, 80%, 100% over the first five years and then falls 80%, 60%, 40%, 20% over the next four, hitting zero after nine full years.
An income percentage based on how much your income has grown since purchase, capped at 100%.

The recapture tax can never exceed 50% of your gain on the sale, and if you sell at a loss you owe nothing. Dispositions due to death are exempt. Any recapture goes on Form 8828, filed with your return for the year of the sale.⁹³

If you expect to move within nine years and your income is likely to climb, run the recapture math before counting the credit as pure savings. The mortgage interest credit rewards homeowners who stay put.

1
Office of the Law Revision Counsel. 26 USC 25 – Interest on Certain Home Mortgages
2
FDIC. Mortgage Tax Credit Certificate (MCC)
3
Office of the Law Revision Counsel. 26 USC 143 – Mortgage Revenue Bonds
4
Internal Revenue Service. Form 1098 Mortgage Interest Statement
5
Internal Revenue Service. Form 8396 Mortgage Interest Credit
6
Internal Revenue Service. 2025 Schedule 3 (Form 1040)
7
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
8
eCFR. 26 CFR 1.25-3 – Qualified Mortgage Credit Certificate
9
Internal Revenue Service. Instructions for Form 8828