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The IRS noticed a number of erroneous claims for Mortgage Interest Credit (Check Box "a", Line 54, Form 1040) in the previous tax year and wants to ensure taxpayers and tax practitioners understand the legal guidelines established for claiming this credit.
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You can claim Mortgage Interest Credit only if you were issued a qualified Mortgage Credit Certificate (MCC) by a state or local governmental unit or agency and they are not same as the mortgage loans issued by the financial institutions. If you have home mortgage and deducts the interest in Schedule A, you must reduce your deduction for home mortgage interest on Schedule A by the amount on Form 8396 Line 3.

What is Mortgage Credit Certificate (MCC) Program ?. What is the eligibility criterias ?

Mortgage Credit Certificate is a Federal tax credit to assist first time home buyers with moderate and low incomes. An MCC reduces your tax liability, dollar-for-dollar, by 20% percentage of the mortgage interest up to $2,000 per year. If your federal income tax liability is less than MCC amount, your tax is reduced only by your net tax liability for that year. However, you can claim the remaining credit on tax returns for the next three years, if your tax liability increases.

You need to meet the income qualifications which is set by the state housing agency for each county. Each lender sets the terms of the mortgage. This includes the interest rate, down payment, underwriting criteria, discount points, and closing costs. You can check with your state's housing agency for the list of approved lenders.

MCC can go along with housing loans. The mortgage interest you paid to the lender is deductible in Schedule A.
When you combine MCC with mortgage loans you need to subtract the MCC amount from the total mortgage interests and claim only the reduced amount in schedule A.

Hope it helps..