First-Time Home Buyer Tax Credits Explained
Scott Steinberg6-Minute Read
April 06, 2021
The first-time home buyer tax credit was a federal program created and introduced under the Obama administration. It was implemented in 2008 at the time of the financial crisis to help make the process of buying a home more affordable and attainable for many Americans by offering first-time home buyers a good-sized tax credit the year they purchased their home. However, it is no longer being offered.
On the bright side for anyone contemplating the prospect of home ownership though, there are still a variety of potential tax credits, grants and financial incentives to be had for savvy buyers looking for assistance purchasing a home. In addition, it is also possible to leverage a variety of additional programs offered by state and local governments that you can tap into to secure your first property and mortgage.
What Is The First Time Home Buyer Credit?
In 2008, financial incentives were needed to help spur Americans to purchase more homes. These incentives were provided via the Housing and Economic Recovery Act (HERA) in the form of a tax credit that provided for up to a $7,500 windfall for first-time home buyers. In 2009, this amount was increased by up to $8,000 in potential tax credits by Congress.
Following these first 2 years, HERA was subject to a number of other legislative changes, most notably concerning whether the tax credit was gifted to you or presented in the form of an interest-free home loan to be repaid later. Regardless of changes in mechanics from year to year though, the net goal of the program remained the same – to create additional home ownership opportunities for hardworking Americans and provide a welcome excuse for first-time home buyers to invest in homes.
As of late 2010 though, the HERA program was discontinued. Note that if you purchased your first home before September 30, 2010, you may still be eligible to benefit from the tax credit program. However, if you purchased a home after this date, you will not be able to capitalize on the advantages of this now-defunct tax credit program.
Financial Aid For First-Time Home Buyers
At the same time, numerous first-time home buyer programs and incentives currently exist that can provide mortgage help at both local and state levels, depending on your current locale and financial situation. To find out more as you start to do your research here, you will want to visit the websites of both local and state government agencies where you reside.
Depending on where you currently live, you may find a number of tax credits offered as part of a first-time home buyer program provided by your state or municipality alongside zero-interest loans or grant monies that can be applied toward your first down payment. In addition, some states may also provide assistance with closing costs (fees paid for various real estate- and lending-related expenses at the time of closing) or offer low-cost down payment loans as a form of financial assistance. Be advised, though: Some first-time home buyer programs (especially those geared towards low-income home buyers) may come with requirements on maximum income and restrictions on property type and value attached. Certain financial incentives may also require repayment.
That said, a search of the Department of Housing and Urban Development (HUD)’s website can also provide information on a variety of different grant and loan options available to first-time home buyers as well. Other options available to you may also include FHA loans or a variety of special low-cost loans offered through individual lenders or federally backed institutions such as Fannie Mae and Freddie Mac.
Other Homebuying Tax Deductions
Although access to the first-time home buyer tax credit isn’t available to the public anymore, homeowners can also tap into a number of helpful deductions that they can claim if they’re looking for a break on their taxes.
For example, homeowners can benefit from mortgage interest deduction (fees charged for the servicing and provision of your home loan) on loans up to $750,000 in total. Note that this interest rate – and associated payments – may fluctuate after an initial period of time if you have an adjustable-rate mortgage, although it will remain set if you instead elected for a fixed-rate mortgage option.
In addition, other tax deductions can be enjoyed here on the price of mortgage insurance premiums if you made less than a 20% down payment on your home’s asking price. Similarly, annual property taxes can also help you claim helpful deductions that reduce the amount you must pay out of pocket upon filing your tax returns.
As you can see, there are a number of tax deductions and vehicles available to first time home buyers that can help you keep more money in your pocket.
First-Time Home Buyer Eligibility Requirements
Looking to get started realizing your dream of homeownership and getting settled into your first starter home? You’ll need to meet a number of general qualifications in order to be considered a first-time home buyer. These qualifications can vary from state to state, or by lender and loan program, but some commonly encountered requirements include:
- You must not have owned your principal residence within the past 3 years
- Must meet preset income limits based on local, county, or state guidelines or a given percentage of median income for the area
- Must be able to afford a set monthly payment based on current income and debt
- Need to contribute a given amount of personal funds towards down payment and closing costs
- Property must be located in a certain geographic area
- The home must meet Housing Quality Standards, as per HUD guidelines
- Maximum limit on price of residence for both existing and new construction homes
- Only certain property types (for example, single family residences, townhomes and condominiums) may qualify
Financial aid and tax breaks or credits can vary widely from state to state and by region. Be sure to check with your local and state government if you have questions concerning any first-time home buying requirements or programs that may apply.
Is There A First-Time Home Buyer Tax Credit For 2020?
Although it is only proposed at present, the Biden administration has suggested that it supports implementing legislation that would give first-time home buyers up to $15,000 in tax credits to apply toward their down payment. This tax credit could be accessed immediately by home buyers as a form of down payment assistance, making it a popular concept with potential homeowners. However, this proposal – which is designed to help offset the economic impact of the pandemic, and support cash-strapped households’ efforts to enjoy greater access to affordable housing – may ultimately drive home prices higher.
Ultimately, the First Down Payment Tax Credit, as it is known, is designed to help renters make the shift to buyers and would provide qualified applications as much as $15,000 in tax credits that could be applied towards their initial down payment. In effect, these sums would be provided to home buyers at the time of closing, helping offset many of the costs associated with purchasing a property, as opposed to being reclaimed upon filing their tax returns. Noting that 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 prove a helpful way of helping families transition from serial renters to first-time homeowners.
In the interim, if you’re looking for immediate financial help with your taxes, you may wish to look at existing assistance programs and tax breaks available via the following websites:
- FHA Loans
- The IRS Mortgage Interest Deduction program
- Private mortgage insurance (PMI) deductions
- Fannie Mae mortgage options
- Freddie Mac mortgage options
- US Department of Housing and Urban Development (HUD) first-time buyer solutions
If you have questions about whether a home is in your future, it may also help to consider factors such as:
- Your credit score and credit history
- Current and future earnings
- Debt-to-income (DTI) ratio
- Current mortgage rates
- Monthly mortgage payments
- Ability to make a 20% down payment
- Need for private mortgage insurance
- Amount of closing costs required
- Maintenance, repairs and upkeep
The Bottom Line
Home ownership is the dream of many renters. At the same time, it’s not always easy – especially in the middle of challenging economic times – to come up with the money needed to support a monthly mortgage and make a large down payment. That’s where first-time home buyer assistance programs and tax credits come in, helping offer aspiring home buyers the resources and flexibility that they need to make the leap from renting to owning.
On the downside, the first-time home buyer tax credit implemented in 2008 under the Obama administration is no longer available. But you can still tap into many local and state government programs designed to make homeownership more accessible and affordable, and enjoy many tax breaks using a variety of alternate programs, grants, and incentives.
Preparing to buy your first house can seem both challenging and overwhelming initially. However, as you can see, with a little research and planning, you too can join the burgeoning ranks of first-time home buyers, which continue to swell with each passing day.