First-Time Homebuyer Tax Credit Explained

Written By
G. Dautovic
Updated
March 25,2022

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, introduced 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 informative 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 New Act Mean for Buyers?

The First-Time Homebuyer Act of 2021 was introduced by Congress in April 2021. 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 first-time tax credit from 2008 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 2021 first-time homebuyer tax credit is designed to help Americans on low and middle incomes to become homeowners. The act is yet to become law. At the moment, it’s still only a congressional bill and has not yet been passed. There’s speculation it could be passed by the end of 2022, but nobody knows when or if it’ll happen for certain. 

How To Qualify for First-Time Buyer Home Tax Credit

If you’re hoping to buy your first home, you may be wondering if you’d be eligible for tax credits for first-time homebuyers. 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. 

If you bought a house under the original tax credit scheme in 2008, you might be eligible for the 2021 new homeowner tax credit, provided that you meet the criteria listed above. If you were to use tax credits in 2021, you wouldn’t be able to reaccess first-time buyer credits until 2026.

Understanding Eligibility Based on Income

One of the criteria for the proposed first-time homebuyer credit is income level. 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. 

You can check median incomes by area by using data from the Bureau of Economic Analysis. To provide an example, if the median income is $60,000 in Columbus, Ohio, an individual applying for tax credits as a single buyer would be eligible for the scheme if they earned less than $96,000 per year. 

How Would the New Act Work?

If the Biden 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 inflation increased by 2% for the next five years, for example, the payment would rise from $15,000 in 2021 to $15,300 in 2022, $15,606 in 2023, $15,918 in 2024, and $16,236 in 2025. 

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. 

At present, there’s no end date, and the act applies to properties purchased from January 2021. 

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

It’s important to understand that the First-Time Homebuyer Act of 2021 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 the First-Time Homebuyer Act of 2021 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. 

Final Thoughts

Good news for first-time buyers in the US could be on the horizon. Congress has introduced a new act, which would provide access to tax credits for first-time homebuyers up to $15,000. While the act has not yet been passed, it could help thousands of people become homeowners if it does become law.

If you’re looking to buy your first home, it’s worth reading up on the first-time homebuyer tax credit to see if it could be beneficial for you.

FAQ

How do I pay back my first-time homebuyer credit?

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The first-time homebuyer tax credit proposed under the First-Time Homebuyer Act of 2021 doesn’t need to be repaid unless a buyer sells their property within four years of receiving the loan. The loan value is automatically applied to the buyer’s tax bill as a credit. If your tax bill is lower than the loan value, you’ll receive the funds via direct debit.

Is there a new tax credit for first-time homebuyers?

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A new act, which would provide first-time homebuyers with tax credits, was introduced by Congress in April 2021. However, the bill has not yet been passed. If the act passes, first-time buyers who are eligible for the first-time homebuyer tax credit will be able to claim tax credits worth 10% of the value of the property up to a maximum of $15,000.

Can I still get the tax credit for first-time homebuyers?

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The original first-time tax credit for first-time buyers is no longer available. However, Congress has introduced the First-Time Homebuyer Act of 2021, which would replace the 2008 act. The act has not been passed into law yet, which means that eligible individuals can’t yet claim tax credits. Once the act is passed, those who meet the criteria will be able to claim tax credits on their first home. Buyers who used the tax credit for first-time buyers in 2008 would be eligible for the scheme introduced in 2021, provided that they meet the criteria for this program.

About author

I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.

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