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The First Time Homebuyer Tax Credit Of 2021 And Other Tax Credits For Homeowners

Melissa Brock5-Minute Read
December 28, 2021

When you buy a home for the first time, you may have to get used to a lot of things related to homeownership – cleaning your own gutters, mowing your own lawn and making property tax payments.

You might dream about those privileges but not be sure how you'll save for a down payment or pay closing costs. Luckily, help may be on the way in the form of tax credits – specifically, first time home buyer tax credits for Americans.

Let's learn more about how tax credits may help you.

What Is The First-Time Homebuyer Tax Credit Of 2021?

The First-Time Homebuyer Tax Credit of 2021, also called the First Down Payment Tax Credit, is a bill that would increase the allowable dollar amount – up to $15,000 – in federal tax credits for first-time home buyers. The bill applies to all homes purchased beginning from January 1, 2021.

The primary goal of the bill is to encourage homeownership among low-income wage earners. The first-time home buyer credit would also help make homeownership more attainable for minority communities, among them, Black and LatinX communities.

A previous first-time home buyer credit through the Housing and Economic Recovery Act (HERA), which expired in 2010, was introduced in the aftermath of the 2008 Great Recession. There is no end date specified in the first-time home buyer tax credit 2021. However, the 2021 bill has not yet been passed into law.

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What Is A Tax Credit?

A tax deduction reduces your taxable income and the tax rate used to calculate your tax. A tax credit, on the other hand, reduces your taxable income and reduces your tax dollar for dollar. A tax credit is different from the mortgage interest deduction, which is a tax deduction for mortgage interest that you pay on the first $1 million of your mortgage debt.

Qualified mortgage interest and points are generally reported to you on IRS Form 1098, Mortgage Interest Statement by the mortgage holder to which you made the payments. You can deduct interest for mortgages taken out on or before October 13, 1987, or mortgages taken out after October 13, 1987, to buy, build or improve your home.

How Will Biden’s First-Time Home Buyer Tax Credit Work?

The first-time home buyer bill would allow home buyers to use the credit as money toward closing but would not require home buyers to wait to get the money back after they file their tax returns the following year.

Eligibility for the first-time home buyer tax credit would be based on past homeownership status and household income, which we'll go over in the next few sections.

Who Will Be Eligible For The Tax Credit?

Since saving up for a down payment is often one of the single biggest hurdles to homeownership for many prospective buyers, the First Down Payment Tax Credit could help families transition from being serial renters to becoming first-time homeowners by shifting the amount they receive toward closing costs.

 

Whether the bill, which Congress cut from the Build Back Better infrastructure bill, passes at all is unknowable at this time. In addition, nobody knows what the final provisions will look like. However, as it stands, the standalone tax credit bill would make eligibility dependent on income level, home price and other factors. 

Must Not Have Owned A Home In The Last 36 Months

As with most federal legislation aimed at first-time home buyers, a first-time home buyer is someone who hasn’t owned a home in the last 36 months (in the last 3 years).

Must Not Exceed Income Limitations For The Area

The current bill would also place income limits on individuals – they must have a modified adjusted gross income (MAGI) of 160% of an area’s median income (AMI). You can find your location’s AMI by using Fannie Mae’s AMI lookup tool.

In addition, to qualify, the home’s purchase price must be 110% or less than the local median purchase price.

Must Be Purchasing A Primary Residence 

The goal is to encourage new low-income wage earners to embrace homeownership, not benefit current homeowners who might be interested in using the credit to purchase a second home or a rental property. Therefore, you must purchase a primary residence to get the tax credit.

Note that by the FHA’s definition, a single-family home can also include multifamily (up to four) units.

Must Be At Least 18 Years Of Age

In most states, a person under the age of 18 cannot enter a contract unless they are emancipated. This bill makes an exception for people under the age of 18 who are married to a spouse who is 18 years of age.

Must Be Purchasing The Home From A Non-Relative

Purchases between family members are not permitted. These types of sales are called non-arm’s length transactions, which is a legal phrase meaning that the parties involved might share mutual interests instead of oppositional interests.

Must Make The Home Your Primary Residence For 4 Years

You would not need to repay the funds (as in previous versions of the first-time buyer credit), but you need to keep the home as your primary residence for at least 4 years. If you sold the home during that time frame, it would mean paying back a portion of the credit.

Are There Any Other Bills Pending That Aim To Help Homeowners?

In July 2021, House Financial Services Committee Chair Maxine Waters (D-CA) introduced the Downpayment Toward Equity Act of 2021 to Congress, though it is pending. This act also aims to help low-income wage earners achieve homeownership and close the racial homeownership gap.

The Downpayment Toward Equity Act of 2021 would offer first-time home buyers in the form of a grant. If passed into law, eligible first-time homebuyers would receive up to $25,000 cash to use for down payments on a house, real estate closing costs, mortgage interest rate reductions and other home purchase expenses.

What Other Help Is There For First-Time Homeowners?

Here are existing assistance programs and tax breaks geared towards helping first-time home buyers:

Government-Backed Loans

Loans originated through the Federal Housing Administration (FHA), Veterans Administration (VA) for eligible servicemembers and the U.S. Department of Agriculture (USDA) offer all home buyers low down payment and low interest rate options. These loans, which are offered by private lenders but insured by the U.S. government, often have easier credit requirements than conventional conforming loans.

National First-Time Homeowner Assistance Programs

Many programs at the national level are aimed at assisting first-time home buyers. Fannie Mae and Freddie Mac offer closing cost credits – up to 3% of a home’s purchase price – to first-time homebuyers who complete an online first-time home homeownership class and go on to buy a HomePath or a HomeSteps home.

Local First-Time Home Buyer Programs

Many states and municipalities offer first-time homebuyer assistance programs. Look for help in your area by visiting the U.S. Department of Housing and Urban Affairs (HUD)’s list of local home buying programs.

The Bottom Line: More Help Might Be Coming For First-Time Home Buyers

Whether you continue to explore your options with first time home buyer programs or look for tax credits that can help you on your income taxes, know that more help has been proposed in Congress – though the future of these bills is up in the air.

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Melissa Brock

Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.