The first-time homebuyer tax credit emerged during the 2008 financial crisis to help make buying a home more affordable for Americans. Though various other mortgage programs and loans exist, the tax provision here was strictly for first-time homebuyers. Simply put, it offered homebuyers a significant tax credit for the year in which they purchased their home. Unfortunately, this credit no longer exists. However, legislation to create a new refundable tax credit of up to $15,000 for first-time homebuyers was introduced in April 2021. But as of December 2023, the legislation still has not passed in Congress. Below, we discuss what the tax credit program did, and explore additional mortgage programs that can still help you save on your first home.
A financial advisor can help you plan for buying a home, as well as other financial goals.
What Is the First-Time Homebuyer Act of 2021?
U.S. Representative Earl Blumenauer (D-OR) and other lawmakers introduced legislation in April 2021, to support first-time homebuyers with a refundable tax credit of up to $15,000.
Dubbed the First-Time Homebuyer Act of 2021, this legislation aims to incentivize “housing stability and generational wealth-building opportunities for low- and middle-income Americans, particularly amongst historically marginalized communities,” Blumenauer said in a press release.
A similar tax credit (see the First-Time Homebuyer Tax Credit below) had been approved as part of the 2008 Housing and Economic Recovery Act. Blumenauer said that the credit was “claimed by nearly 1.5 million households to assist in their purchase of a home.”
Text for the bill says that first-time homebuyers of a principal residence in the U.S. could claim a tax credit equal to 10% of the purchase price of the tax residence during that tax year. However, this tax credit cannot exceed $15,000. Depending on your tax filing status, the bill limits the credit to $7,500 for married individuals filing separately.
You should note that as of December 2023, the bill still needs to be approved in both chambers of Congress before it can be signed into law by the president. If you are looking for other tax credits, we cover some options in the “What Can You Deduct After Buying a Home” section below.
What Is the 2008 First-Time Homebuyer Tax Credit?
The Obama administration enacted the federal first-time homebuyer tax credit in 2008. Created as a response to the 2008 financial crisis, the Housing and Economic Recovery Act (HERA) allowed new homebuyers to get a tax credit of up to $7,500 during the first year of the initiative.
In 2009, Congress increased the amount first-time buyers could earn to $8,000. After the first two years, HERA had some minor changes. Under the initiative, first-time homebuyers could either earn a tax credit or a home loan they had to repay later. Although the changes were slight, the mission was the same: aid first-time homebuyers.
If you’re still looking for the first-time homebuyer credit, it unfortunately no longer exists. The program ended in 2010. However, people who purchased homes before 2010 can still benefit from the tax credit initiative. Specifically, you may still be eligible if your closing took place on or before Sept. 30, 2010. People who purchased homes after 2010, however, won’t benefit from the tax credit.
Other Types of Help for First-Time Homebuyers
Although the 2008 tax credit no longer exists, you can still get mortgage help through other mortgage programs. These first-time homebuyer incentives vary both on state and local levels. But you can begin your search process with some online research. One of the best places to search for such incentives is through local and state government websites.
The Department of Housing and Urban Development (HUD) also offers several loan and grant options for homebuyers. You’ll also want to do some research on the lenders in your area. In most cases, they’ll be able to offer thorough professional advice about the programs that exist and the application process. Finally, though they are not all tax credit programs, you can also apply for Freddie Mac, Fannie Mae and FHA loans. Each loan option allows you to benefit from a mortgage loan even with a down payment as low as 3%.
A mortgage credit certificate (MCC) is a tax credit given by the IRS to low and moderate-income homebuyers. Generally, the program is only available to first-time homebuyers. Terms differ by state. An MCC can be a great way to use your home to save money on your taxes, but there are some drawbacks as well as hidden costs, so use caution in deciding whether to use the program.
Finally, first-time homebuyer loan programs, of which there are many, generally enable people with low or moderate incomes or with less-than-stellar credit scores to live a part of the American Dream, which is to say, purchase a home. Check this overview of the many targeted loan programs available for first-time homebuyers.
Finally, the IRS lets first-time homebuyers take up to $10,000 from their traditional IRAs and Roth IRAs to help buy or build a home. You can use the money without having to pay the 10% early withdrawal penalty, but you will still have to pay regular income tax on the withdrawal.
What Can You Deduct After Buying a Home
Though the first-time homebuyer tax credit is no longer an option, there are other deductions you can still claim if you’re a homeowner. The biggest is the mortgage interest deduction, which allows you to deduct interest from mortgages up to $750,000.
Mortgage interest is the interest fee that comes with a home loan. The fee accompanies most home loans where lenders use the home as collateral for the mortgage. Mortgage interest typically comes at a fixed rate, an adjustable rate or a combination of both. The fixed-rate interest will charge the borrower a set percentage of interest throughout the loan.
The adjustable-rate mortgage interest, however, fluctuates based on market behaviors. This means that the amount of interest you pay per month will vary. Finally, the hybrid adjustable-rate mortgage comes with an initial fixed interest rate. However, the interest rates fluctuate after the initial period ends.
Property taxes are also a great avenue when it comes to deductions. You get to write off your annual property taxes the year you pay them. As for mortgage insurance, you can receive an insurance premium if you paid a down payment of less than 20% of the home’s original value. Under IRS law, your mortgage insurance premium counts as mortgage interest that you can deduct on Schedule A of Form 40.
Bottom Line
Though you can no longer take advantage of the first-time homebuyer tax credit, legislation to create a new refundable first-time homebuyer tax credit of up to $15,000 was introduced in April 2021. But as of December 2023, the legislation still has not passed in Congress. You can also save a lot of money on your taxes through other tax breaks. The mortgage options vary per city and state but don’t worry. The primary deductions any homeowner can benefit from include property taxes, mortgage interest and insurance and mortgage points. The amount of money you save will ultimately depend on your drive to research and find the available programs and options in your area.
Tips for First-Time Homebuyers
- Creating a home-buying plan is an important step, but it can be challenging. That’s where a financial advisor can offer valuable insight and guidance. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Buying a home is exciting, but there are hoops you’ll have to jump through before you can call yourself a homeowner. Between organizing your financial documents, applying for a mortgage and scheduling an appraisal, the process can make your head spin. Asking some key questions along the way can make navigating the waters easier.
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