What Is The First-Time Homebuyer Tax Credit?

Tax credits are like rewards from the government for doing certain things, and they work by directly lowering the amount of tax you have to pay. But what about the first-time homebuyer tax credit? Well, it’s a special tax break for people who want to buy a home. 

Even though this particular reward ended 13 years ago, President Biden suggested a similar idea in March 2024. In the meantime, first-time home buyers can still get help from different government programs that offer rewards, deductions, and other types of support to make buying a home easier. Here’s what you should know.

Tax deductions

First-time homebuyer mortgage loans, down payment assistance, and other federal programs can cut down on the initial expenses of buying a primary residence.

One of the best ways to offset the costs of buying a property is to tap into available tax deductions. Keep in mind that most of these are only available to people who are using the property as their primary residence, and you must itemize deductions on your return.

Here are some of the costs that can be deducted after buying a home:

Property taxes

You can deduct property taxes up to $10,000 on your federal return.

Mortgage interest

You can deduct your mortgage interest on your taxes, up to the first $750,000 of debt, or $375,000 if filing separately (but married). For a more accurate payment estimate you would need a loan calculator or to consult with a loan officer. 

Loan origination fees/mortgage points

While this benefit expired in 2022, if you paid your premiums before Dec. 31, 2021 and met certain criteria, you might have been able to deduct these up-front expenses with your next new home purchase.

Who qualifies for first time homebuyer tax credits? 

It might seem straightforward, but there’s a specific definition, especially for federal government agencies and programs.

According to the U.S. Department of Housing and Urban Development (HUD), you could be eligible as first-time buyers for a mortgage  if you meet these requirements:

• You haven’t owned a new home or co-signed on a mortgage in the past three years.
• You’re a single parent who only co-owned a property with a former spouse while married.
• You’re a displaced homemaker who has only owned a home with a spouse.
• You’ve only owned a home that isn’t permanently fixed to a foundation.
• You’ve only owned a home that doesn’t meet state or local building codes and can’t be brought up to code for less than building a permanent structure.

So, even if you’ve technically had ownership of a property before, you could still qualify as a first-time homebuyer for the tax credit.

Tax credits are often more attractive than deductions. A deduction lowers your taxable income, but a credit directly reduces the amount of tax you owe. For example, if you owe $10,000 in federal tax but receive a $1,000 tax credit, your tax bill payment will be $9,000.

Other requirements for the tax credit must also be met. Here’s what you need to know:

First-Time Homebuyer Status

This means you haven’t owned a home or co-signed on a mortgage within the past three years. This rule applies to both primary residences and second homes. It is even possible to be a first-time homeowner again.

Previous Use of Tax Credit

You can only use the tax credit once. However, if you used the 2008 tax credit, you might still be eligible for the 2024 credit.

Income Limits

There are income requirements based on where you live. Your income must not exceed 160 percent of the median income for your area.

Age Requirement

You must be at least 18 years old at the time of purchasing your property, or married to someone who meets this requirement.

Purchase from Relatives

You cannot purchase a new home from a direct relative, including a spouse, parent, child, aunt, uncle, cousin, or grandparent. Meeting these additional requirements is essential to qualify for the tax credit.

Mortgage Relief Credit Program

In his State of the Union address on March 7, 2024, President Joe Biden introduced a program called the “mortgage relief credit.” This program aims to provide tax credits to both first-time new homebuyers and home sellers.

For eligible middle-class homebuyers, the program offers an annual tax credit of $5,000 for two years, totaling $10,000. This credit effectively reduces their mortgage rate by more than 1.5 percentage points, based on the median purchase price of a home.

Additionally, the program provides a one-year tax credit of up to $10,000 to sellers of starter homes. A starter home is defined as a residence priced below the median home price in their county, and the buyer must intend to live in the home.

President Biden also reiterated his proposal to offer up to $25,000 in down payment assistance to first-generation homebuyers.

Reasons Why Tax Returns are Requested

One primary reason is to trace large deposits. If a significant deposit appears in a bank account, the underwriter may ask for a letter of explanation to confirm that the deposit came from a tax return. Discrepancies between the tax return and the deposited amount may require further clarification. For instance, if a homebuyer hires a tax preparation service that charges a fee, the deposited amount might differ from the expected refund. Providing the tax return along with the invoice from the tax service helps clarify these differences. It’s crucial to note that underwriters don’t assume the source of large deposits, emphasizing the importance of thorough documentation and explanation from the homebuyer to prevent delays in approval.

Another reason is when the borrower has their own business or receives a 1099. In such cases, the underwriter needs to verify the borrower’s income and ensure there are no outstanding taxes. If taxes are owed, proof of a payment plan or evidence of payment is required. Additionally, if the borrower has Schedule C income, the underwriter verifies that it matches the income reported for that year. This verification involves comparing 1099 forms and profit and loss statements. Similar verification occurs for borrowers with W-2 forms, especially for loan programs with income limits.

What to Do If the Underwriter Requires Tax Returns?

If the underwriter requests the last two years of tax returns, there’s no need to worry. The homebuyer must provide all pages of the tax return and any additional schedules filed. On the second page of the tax return labeled “1040,” all filers, including the spouse for joint filings, must sign and date in pen in the “Sign Here” section. This confirms to the underwriter that the information provided is accurate to the best of the borrower’s knowledge.