MORTGAGES

What Is the First-Time Homebuyer’s Credit?

The federal tax credit for first-time homebuyers credit was a tax-free benefit available to qualified couples and individuals who bought an apartment within the month of April between April 8, 2008, and May 1, 2010. 1 This tax credit was created as part of the economic recovery plan initiated in the Obama administration in the aftermath of the financial crisis that occurred from 2007-2009.

Even though the program has ended and is not longer in operation however, you could still be eligible for the State tax deduction for the purchase of your first home, based on the location you reside in. The Biden administration also has proposed the creation of a tax credit for homebuyers which could help you purchase homes much easier in the future.

Key Takeaways

  • The tax credit for first-time homebuyers was included in the 2009 Housing and Economic Recovery Act to stimulate the economy..
  • It was valued at 10percent of purchase price, if it was within certain limit.
  • First-time homebuyers can still qualify to receive tax credits from the government of their state along with aid with the down payment as well as closing cost.

 

What Was the First-Time Homebuyer Credit?

The credit for first-time homebuyers was included in the legislation of 2008, known as Housing and Economic Recovery Act. HERA was a broad piece of legislation that was designed to stimulate economic growth following the aftermath of recession. 2 The tax credit was intended to motivate consumers to buy homes which would assist to boost the economy.

The tax credit for homebuyers was extended to qualified individuals and couples. The tax credit for homebuyers was 10 percent of the home’s purchase cost. The maximum limit for credit was based on when you purchased the house.

Three examples of the amount that the credit could be worth during the years it was available. If you bought a house:

  • If you had a credit card in 2008, it could be worth $7,500.
  • From 2009 to the beginning of the year 2010 Your maximum credit amount would be $8,000.
  • If you were to purchase the house you previously owned from November 7, 2009 until May 1, 2010 the maximum amount of credit you could be $6,500.

If you qualify to receive this 2007 credit and were eligible, it was regarded as a non-interest loan. The IRS obliged homebuyers to pay back their credit within a 15 year period with an individual federal tax hike. The credit was not required been repaid to buyers who bought homes in 2009 and 2010 with a few exceptions. The credit for 2008 and 2009 were only accessible to those who had not owned a house within the previous 3 years. 

Note

While it could seem easy although it may seem straightforward, it’s not. A “first-time homeowner” is a term that has a specific definition by the IRS. In order to qualify for the credit the buyer (and your spouse in the event of marriage) must not have had any other primary residence for the last three years prior to purchasing your new home. This credit is also subject to restrictions regarding income, residency, as well as citizenship. 3

Criticism of the First-Time Homebuyer’s Credit

First-time homebuyer credit is an excellent method of helping those who are buying their first home however, these programs haven’t always provided equal homeownership opportunities to those who are considered to be marginalized. The systemic racism that is prevalent within the mortgage industry has resulted in significant variations in homeownership rates among Black or White households. These disparities reduce the chance of prospective Black homeowners obtaining mortgage approval, and also for first-time buyers getting a credits. 

 

Will the First-Time Homebuyer Credit Be Reinstated?

In April 2021 Rep. Earl Blumenauer introduced a bill to help first-time buyers by providing the possibility of a tax credit at least $15,000. 5 Much similar to the original version that was introduced, this bill aimed at making homeownership more affordable to low and middle-income families. The bill specifically targeted the discriminatory policies in housing. 6 For one time period, it was on the House Committee on Ways and Means without action and as of May 20, 2022 the status of the bill was waiting for approval.

 

State Tax Credits for First-Time Homebuyers

The federal credit for first-time homebuyers is now expired, while legislation that would reinstate it is unfinished in Congress First-time homeowners shouldn’t count on any federal tax credits for the foreseeable future. If you’re looking to purchase an apartment now, however it is possible to receive discounts on taxes or get other advantages on a state-level. The kinds of aid that you could benefit from include:

  • Tax credits to purchase the home of your dreams
  • Down-payment grants
  • Closing-cost assistance

For instance, Idaho offers its residents the mortgage credit certificate. Homebuyers can get the federal tax credit that can be up to 35% the mortgage interest that is paid each year, and up to $2,000 annually. 7 First-time homebuyers who meet the requirements of income limits and other requirements might be eligible to avail of the credit program and cut down on the cost of mortgage interest. Some states also offer similar programs.

The state of New York City, the HomeFirst Down Payment Assistance Program provides up to $100,000 towards the cost of a down payment, as well as closing cost for qualified buyers. 8 You have to be a first time homebuyer to be eligible and within the upper limit of income for the size of your household. The eligibility requirements for the down-payment assistance grant within the state may be a huge hurdle to purchasing a home.

New Jersey offers a down assistance program for payment that offers up to $10,000 of credit that is interest-free and forgiven to first-time homeowners. 9 This cash can be used to pay for the down payment or closing expenses. You must buy an apartment within New Jersey and use an approved mortgage lender to be eligible for.

The housing authority of your state should know whether you qualify to receive tax credits or down payment assistance or any other assistance for those who are the first time homebuyers.

Note

Certain closing-cost and down-payment assistance programs require you to stay in the same house for a set amount of time. If you leave prior to reaching that number, you could be required to pay back any money you are awarded.

 

Other Tax Advantages for Homebuyers

Apart from receiving some tax advantages when you purchase a house Once you’re officially a homeowner, you may benefit from tax deductions that are available to federal taxpayers. These deductions are beneficial since they lower your tax-deductible income during the entire year.

It is possible to deduct the tax deduction for mortgages For instance, the mortgage interest deduction lets you deduct interest on eligible mortgage loans. You are able to deduct the interest paid of the very first $750,000 mortgage debt if you purchase a home in the year after December 15 the 15th of December, 2017. 10 The IRS reduces that amount by the half for married couples who, but submit jointly tax returns jointly.

The property tax you pay on the home that you own is tax-deductible according to the local and state taxes (SALT) deduction rules. Total amount for local and state taxes that you can take deductions for (including tax on property) is limited to $10,000, however new legislation is being considered to remove the limitation. 

If you buy a home through the Federal National Mortgage Association (FNMA) and you are qualified to be a part of the HomePath ReadyBuyer program. This program is designed to assist buyers who are first time buyers and repair houses that were foreclosed. You can receive the equivalent of 3% closing costs assistance once you’ve completed an online education on buying a home. 

Note

You must itemize your tax returns to be eligible for SALT or mortgage interest deductions. Make sure you compare the tax advantages with what you can get by taking an ordinary deduction.

 

The Bottom Line

The process of buying a house is stressful however incentives to buy a home and assistance for buyers programs help ease the process. While there is no tax-free first-time homebuyer credit is available on a federal scale, it could be coming once more. While we wait, it’s worthwhile looking at what’s on offer in the states in order to make purchasing a home for the first time possible.

the authorAaron Krause

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