The First-Time Homebuyer Credit And Other Tax Credits For Homeowners

It requires a significant amount of money upfront to buy a home between the down payment and closing costs. Because homeownership plays such a fundamental role in the American dream for many and it drives many areas of the economy, there was once a federal first-time home buyer tax credit. We’ll look at efforts to revive it and other programs that are available.

What Is The First-Time Home Buyer Tax Credit?

A first-time home buyer tax credit is one that’s available to first-time buyers, typically for a primary residence. The definition of a first-time buyer depends on the details of the legislation under which the credit is available.

It’s important to note the difference between credits and deductions. A tax credit reduces your taxable income and reduces your tax dollar for dollar. A tax deduction, on the other hand, reduces your taxable income and potentially the tax rate used to calculate your tax.

An example of a popular homeownership-related deduction is the mortgage interest deduction, which is a tax deduction for mortgage interest that you pay on the first $750,000 (or $1 million if you bought the house before December 16, 2017) of your mortgage debt.

Qualified mortgage interest and points are generally reported to you on IRS Form 1098, Mortgage Interest Statement by the mortgage holder to which you made the payments. You can deduct interest for mortgages taken out on or before October 13, 1987, or mortgages taken out after October 13, 1987, to buy, build or improve your home.

Federal credits have long been available for things like making energy efficiency improvements to your home. However, there’s a Congressional effort to pass a first-time home buyer credit under the Decent, Affordable, Safe Housing for All (DASH) Act. It’s only been introduced, so it has many hurdles to clear before passage, but here are the details:

• It’s a refundable tax credit for first-time home buyers, defined as not having purchased a primary residence before and never taken advantage of the previous first-time home buyer tax credit.
• The credit is for up to 20% of the purchase price, up to a maximum of $15,000. The dollar amount would be adjusted for inflation beginning in 2025.
• Your tax basis in the home is reduced by the amount of the credit you get. This means that if you pay $250,000 for a home, but get a $15,000 credit, the tax basis would be $235,000 if no other factors were taken into account.

Is The First-Time Home Buyer Tax Credit Currently Available?

The only time a federal first-time home buyer credit was on the books was during a period following the last financial crisis. That existed for purchase agreements from 2008 – April 2010. Since then, there have been multiple attempts to create a similar program including the First-Time Homebuyer Act of 2021 and the DASH Act introduced in the current Congress.

Who Qualifies For The First-Time Home Buyer Tax Credit?

The qualifications for these programs depend on the details in any law that’s passed. For the purposes of this post, the qualifications we refer to are based on what’s included in the DASH Act. Here are those details:

• There’s a phaseout of the credit above 110% of the local conforming loan limit across a range of $100,000. This means you could still qualify for the credit even if your home is up to $100,000 more pricey than the conforming limit, but you’ll qualify for less.
• There is also a phaseout of the credit based on income for single filers making more than $100,000 ($200,000 if married filing jointly) across a $50,000 range, meaning if you’re single, you can still qualify for a credit within income up to $150,000, but you’ll receive fewer dollars.
• If you sell off your home before your sixth year of ownership, you’ll have to pay back the credit in an amount that decreases 20% for every year you own the home. There are exceptions, including death of a spouse or divorce, conversion of the home for another use against your will, military service station changes, loss of employment or a condition affecting your health.
• You’re not eligible if you’re under 18, someone else can claim your credit based on you being a dependent, you’re a nonresident alien or you’re married filing separately.

Other Tax Credits For First-Time Home Buyers

Although there is no first-time home buyer credit at the federal level, there are several other programs that you can look into. These are either credits or special things you can do to fund your home transaction.

Mortgage Credit Certificate (MCC) Programs

Mortgage Credit Certificate (MCC) programs are put in place by states that issue credits intended to help lower-income individuals afford homeownership. These programs allow you to take a dollar-for-dollar credit on your taxes for a certain amount of the mortgage interest you pay.

The amount of the credit can be as high as $2,000. You do have to reduce your mortgage interest deduction by the amount of the credit.

If your property value is higher than the home value on which the credit is based, you divide the debt amount contemplated by the MCC by the original amount of your mortgage. This is the percentage of interest on which you can take the credit. You multiply the resulting decimal by the interest you paid for the year to figure out your credit amount.

Home Energy Tax Credits

There are a couple of home energy tax credits you may qualify for under the Inflation Reduction Act of 2022. You have to meet requirements set by the Department of Energy.

If you qualify for the Energy-Efficient Home Improvement Credit, you can defray some of the cost of the following:

• Exterior doors, windows, skylights and insulation
• Central air, water heaters, furnaces, boilers and heat pumps
• Biomass stoves and boilers
• Home energy audits

The amount of the credit is a maximum of $1,200 for the taxable years of 2023 – 2032, with no annual limit. There’s a separate $2,000 annual limit for heat pumps, biomass stoves and boilers.

Separately, there’s a Residential Clean Energy Credit focused on the following:

• Solar, wind and geothermal power generation
• Solar water heaters
• Fuel cells
• Battery storage

The credit is based on a percentage of your costs, with no annual maximum amount or lifetime limit:

• 2022 – 2032: 30%
• 2033: 26%
• 2034: 22%

Borrowing Against A Retirement Plan

Withdrawals from retirement accounts before age 59 ½ are generally considered early distributions and may be subject to tax penalties. However, you can take a loan from an employer-sponsored plan such as a 401(k) or Roth 401(k) if your employer allows. If paid back according to the terms, this isn’t considered in early distribution.

In terms of your loan amount, you can borrow the lesser of the following:

• The greater of $10,000 or 50% of your adjusted balance in your retirement account
• $50,000

Generally, loans must be paid back within 5 years to avoid being considered an early distribution. However, loans taken for the purpose of purchasing a primary residence may be paid off over a longer timeframe at the plan administrator’s discretion. Speak with a financial advisor about your situation before making any decision regarding your retirement plan.

Other Assistance Programs For First-Time Home Buyers

Beyond the credits mentioned here, there are several other programs for first-time home buyers that may be available to you.

State-Level Down Payment Assistance Programs

You may be able to get down payment assistance from state or local authorities as well as housing-focused nonprofits. This could be in the form of grants, forgivable, deferred or traditional loans, individual development accounts or matched savings programs.

Make sure your lender will accept the funding from the program. Our friends at Rocket Mortgage^® allow funding from local government entities and municipalities, eligible nonprofits, federally registered Native American tribes, as well as employer assistance. State housing authorities and housing finance agencies aren’t accepted.

Another point is that each of these programs have their own requirements. You may be required to be a first-time home buyer and qualify with much of the same information you would use to apply for the mortgage itself, including income and asset documentation along with a credit check.

Fannie Mae And Freddie Mac Programs

Fannie Mae and Freddie Mac have their own offerings for home buyers. There are three programs that might be of interest.

Home Possible^® and HomeReady^® are 3% down mortgage options for those who make less than 80% of the area median income where they’re looking to buy. Rocket Mortgage clients can get a credit toward closing costs worth 1% of their loan amount or $2,000, whichever is greater. You’ll need a minimum 620 median credit score to qualify. If you make no more than 50% of the median income where you're looking to buy, you can get a $2,500 grant.

Rocket Mortgage is offering a conventional loan option with 1% down and a 2% grant toward your down payment with eligible loan amounts up to $350,000.¹ This could be helpful for those who can afford a mortgage but may not have the savings handy and need to get into a house. The same income limits apply as above. A 620 qualifying FICO^® Score is required.

Government-Backed Loans

There are also government-backed mortgages you may be able to take advantage of, including both Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans.

FHA loans are a low down payment option. If you have a 580 qualifying FICO^® Score, you can get into a home with as little as 3.5% down. With a slightly higher credit score of 620 or better, you may be able to qualify with a higher debt-to-income ratio (DTI) than most other loan options. Although many lenders, including Rocket Mortgage, don’t offer it, your credit score can be as low as 500 with a 10% down payment.

There are both upfront and monthly mortgage insurance payments associated with FHA loans. If the down payment is less than 10%, this exists for the life of the loan.

VA loans are a 0% down loan option for eligible veterans, active-duty service members, reservists, National Guard personnel and qualified surviving spouses. There’s no minimum credit score set by the VA, but lenders have their own requirements. Rocket Mortgage requires a minimum 580 qualifying score.

There’s a funding fee of between 1.25% – 3.3% based on the size of your down payment and how many times you’ve used a VA loan. However, this can be built into the loan amount, and it’s waived for disabled veterans and a few other circumstances. Ask if you qualify for a VA funding fee waiver when you apply for a loan.

The Bottom Line

The last federal first-time home buyer tax credit ended with purchase agreements dated after April 2010. Since then, there have been attempts to revive a similar program including one currently in Congress. Nothing has passed at this time. There are other tax credits on the books, including mortgage interest credits and home energy tax credits.

Beyond the tax code, other sources of support include state and local down payment assistance programs. Fannie Mae and Freddie Mac have their own offerings and there are government-backed mortgages with low down payment requirements as well.

Do you feel ready to move forward? Our friends at Rocket Mortgage can help you start the mortgage approval process today.

¹Client will be required to pay a 1% down payment, with the ability to pay a maximum of 3%, and Rocket Mortgage will cover an additional 2% of the client’s purchase price as a down payment, or $2,000. Maximum grant amount is $7,000. Offer valid on primary residence, conventional loan products only. Maximum loan amount of $350,000. Cost of mortgage insurance premium passed through to client effective January 2, 2024. Offer valid only for home buyers when qualifying income is less than or equal to 80% median income based on county where property is located. Not available with any other discounts or promotions and cannot be retroactively applied to previously closed loans or loans that have a locked rate. This is not a commitment to lend. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply.