First-Time Homebuyer Tax Credit Explained

With the cost of living increasing, for many Americans, buying a first home has become less attainable than some years ago. 

The First-Time Homebuyer Act of 2021, proposed in April 2021, is one measure aimed at helping people get onto the property ladder. Under this new bill, eligible buyers would be able to claim a first-time homebuyer tax credit worth up to $15,000.

In this article, we’ll explain who could benefit from this tax credit and how to find out if you’re eligible for the scheme. 

What Does the Act Mean for Buyers?

Many aspects of the bill are based on a similar bill brought in by Congress in 2008 as part of The Housing and Economic Recovery Act of 2008. 

The 2008 act allowed eligible buyers to access an interest-free loan up to the value of $8,000 to help them to buy their first home. For those who bought their property in 2008, the loan was repaid over a 15-year period, but buyers who purchased their home in 2009 or 2010 were exempt from paying back the tax credit.

The original tax credit ended in 2010, and there have been calls to reintroduce tax credits to help buyers take the first step onto the property ladder.

In 2021, a revised version of the original was put forward. Under the new bill, eligible buyers would be able to access a first-time homebuyers tax credit worth 10% of the value of the property up to a maximum of $15,000. 

The revised act is designed to help Americans on low and middle incomes to become homeowners. The act is yet to become law. As of December 2024, it’s still only a congressional bill and has not yet been passed by the Senate. There’s speculation it could be passed by the end of 2025, but nobody knows when or if it’ll happen for certain. 

How To Qualify for First-Time Buyer Home Tax Credit

If the act is passed, buyers must meet eligibility criteria. To qualify for a tax credit for buying a house, you must comply with the following requirements:

• You must be a first-time homebuyer. You can’t have either co-signed on a mortgage or owned a property in the last three years. This includes primary residences as well as second homes. 
• You must be purchasing a primary residence. You can’t claim the tax credit if you’re buying a second home or a rental property.
• You must be aged at least 18 or be married to a person over 18.
• You must purchase a home from a vendor not related to you.
• You must meet the income eligibility criteria in your area. To qualify, you must have an income that is no higher than 60% above the average income for the area. If you’re submitting a joint application with a spouse, or you have several income streams, the threshold will be higher.

Understanding Eligibility Based on Income

To qualify for refundable tax credit, you’ll need to ensure that your earnings don’t exceed the upper threshold for access to the first-time homebuyer tax credit program. Your income should be no higher than 60% above the median income for your location.

How Would the New Act Work?

If the first-time homebuyer tax credit is passed, it’ll work in a very similar way to the original 2008 tax credit. Here is a breakdown, which explains how the credits would work:

• If you’re eligible for the tax credit scheme for first-time buyers, you would receive a loan for 10% of the value of the property up to a maximum price of $15,000.
• When you receive your loan payment, the tax credit will be applied automatically to your federal tax bill. You don’t need to submit a formal application, but you may need to fill in an extra IRS form to accompany your tax return. 
• If you own your home for a minimum of four years, you won’t have to pay back your tax credit.
• If you sell the house within four years of receiving your loan, you’ll be required to pay back some of the credit. This doesn’t apply in cases of death, divorce, and military relocations or for transactions where your income from real estate is lower than your tax liabilities. 

The 2021 first-time homebuyer tax credit is equal to 10% of the home’s value up to $15,000. It’s important to note that the value must not exceed $15,000 in inflation-adjusted dollars. This means that if inflation rises, the value of the loan will increase.

If you’re buying your first home, you’re eligible for the first-time homebuyers tax credit, and your tax bill is less than $15,000, the amount owing to you would be paid to you via a direct debit transfer.

What if You Sell Your Home After Receiving Homebuyer Tax Credits?

It’s important to understand that the act is designed to support low and middle-income families and individuals who want to purchase their own property. This is not a scheme open to people looking to flip properties or build an investment portfolio.

If you choose to sell your home after receiving first-time homebuyer tax credits, you may be required to pay back some or all of the credit. The amount you repay will depend on how long you have owned the house or apartment, as follows:

• 100% tax credit repayment if you sell the property within one year
• 75% tax credit repayment if you sell within two years
• 50% tax credit repayment if you sell within three years
• 25% tax credit repayment if you sell within four years

There are exceptions, including death, divorce, and some military transfers. 

Alternative Options Available to First-Time Buyers

While this act is still under consideration, it’s understandable for buyers to want to explore other options. Here are some alternatives that may prove beneficial.

The Downpayment Toward Equity Act of 2021

Some buyers may have heard of the Downpayment Toward Equity Act of 2021. This act is designed to assist first-time buyers and close generational gaps between older and younger buyers. 

Like the First-Time Homebuyer Act, this act has also been introduced by Congress but not passed. If it does pass, eligible buyers would be able to access a payment worth $25,000 to offset the cost of buying a house, including taxes, closing fees, and interest. 

Mortgage Credit Certificates

Mortgage credit certificates are available for eligible homebuyers purchasing real estate with the help of the state or local government. This is a federal tax credit that can reduce annual tax bills. 

The credit is capped at $2,000 per year by the IRS. Most people who qualify for a mortgage credit certificate are either first-time buyers or individuals or couples on a low income. 

State and Community First Homebuyer Grants and Loans

In some cases, buyers can access financial support and assistance through state and local programs.

Some buyers may be eligible for grants and low-interest mortgages, which can make buying a house more affordable. It’s worth investigating programs in your local area before looking at conventional mortgage providers. 

Low Downpayment Loans

One of the main obstacles for buyers who want to buy their own home is difficulty saving a downpayment. If this scenario applies to you, you may be able to access low downpayment loans backed by government agencies. 

There are approved lenders that specialize in helping specific types of buyers, for example, veterans, individuals looking to purchase properties in rural areas, and buyers with a low-fair credit score.