What Is A First-Time Home Buyer: Explained

Who qualifies as a first-time home buyer isn't as straightforward as you may think. The term has changed over the years and varies slightly depending on which tax code or institutional definition you’re referencing.

A first-time home buyer isn’t necessarily an individual purchasing their first home. A first-time home buyer is generally defined as a person or household that hasn’t owned a principal residence within a specific time frame.

The definition has a tremendous impact on buyers who want to take advantage of the financial perks it provides, including first-time home buyer assistance programs, grants, tax benefits, more favorable home loan terms and other advantages we will explore in this article.

Advantages Of Being A First-Time Home Buyer 

There are a range of valuable incentives and programs available to first-time home buyers, including:

• IRS tax deductions: Like all homeowners, first-time home buyers can benefit from IRS tax advantages, including the mortgage interest deduction, the property tax deduction and the origination fee deduction, which all reduce your federal income tax liability.
• Grants and state assistance: Cash grants and incentives are extended to first-time buyers by local governments and Fannie Mae.
• Lower down payments: Mortgage lenders and government-sponsored enterprises like Fannie Mae and Freddie Mac offer low down payment loans to first-time home buyers. The Department of Housing and Urban Development (HUD) provides Federal Housing Administration (FHA) loans to first-time home buyers.
• Penalty-free withdrawals: The IRS allows first-time home buyers to dip into their 401(k) or IRA to buy a first home without the usual penalties.
• Veteran benefits: Qualified military personnel and their families can take advantage of the benefits VA loans offer to buy their first home, including relaxed credit requirements, no loan limits and lower down payments.

Qualifications For A First-Time Home Buyer, Explained 

HUD uses the following five criteria to identify first-time home buyers. A first-time home buyer meets any of the following criteria:

1. You haven’t owned a home or served as a co-signer for a mortgage within the last 3 years.
2. You’re a single parent who previously owned a home when you and your former spouse were married.
3. You’re a displaced homemaker who only owned a home with a spouse. For example, you left the workforce to take care of your family and are purchasing a home on your own now.
4. You owned a home that wasn’t permanently fixed to a foundation (e.g., a mobile home).
5. You owned a home that didn’t meet state or local building codes and fixing it would cost more than constructing a new, compliant structure. For example, your first home has safety concerns or structural defects that make the property uninhabitable, so you need a new home. 

Many state assistance and financial aid programs have adopted HUD’s criteria for defining a first-time home buyer. Specifically, the first one: not owning a home within the last 3 years. A first-time home buyer can be more than a prospective buyer who has never owned a home.

First-time home buyer status is determined retrospectively over 3 years, starting from the closing date of the upcoming home purchase, not your mortgage application date.

Additional criteria will vary based on lender requirements. For example, many assistance programs and lenders add that the individual or household must purchase a property as their primary residence.

Examples Of First-Time Home Buyers

Let’s walk through common scenarios to illustrate how different first-time home buyer definitions may apply to your situation.

You Want To Buy A Home With Your Spouse Who Is A Homeowner

Both of you can qualify as first-time home buyers as long as neither of you has purchased or claimed a previous home as a primary residence in the past 3 years.

You Owned A Home With Your Former Spouse

You can qualify as a first-time home buyer if you’re a single parent buying a home on your own or are a displaced homemaker who hasn't owned a home outside their marriage.

You Are A U.S. Veteran

As a veteran, you can take advantage of the benefits VA loans offer. VA mortgages allow buyers to finance 100% of a home with a $0 down payment. The home must be your primary residence and can't be used as an investment property.

You Own An Investment Property You Haven’t Lived In Over 3 Years

If you own or have owned a rental or investment property and haven’t claimed it as your main residence for 3 years, you may qualify for an FHA mortgage when purchasing a new home. If you still own the investment property, you may qualify for conventional mortgages backed by Fannie Mae or Freddie Mac, even if you aren’t considered a first-time home buyer.

Your Previous Home Was A Mobile Home

Since your previous property wasn’t attached to a permanent foundation, you’ll qualify as a first-time home buyer.

Top Mortgage Options For First-Time Home Buyers

Conventional Loans

Advantages: Requires a 3% down payment and has competitive interest rates.

Considerations: Stricter credit score and income requirements compared to government-backed loans.

FHA Loans

Advantages: Low down payment requirements (as low as 3.5%), lenient credit score requirements and competitive interest rates.

Considerations: Borrowers typically pay mortgage insurance premiums (MIP) for the life of the loan.

USDA Loans

Advantages: Zero down payment for properties in USDA-designated rural areas, lower interest rates and flexible credit requirements.

Considerations: Limited to specific rural and suburban areas, income restrictions apply. Rocket Mortgage^® doesn’t offer USDA loans at this time.

HomeReady^® and Home Possible^® Loans

Advantages: Freddie Mac’s Home Possible^® and Fannie Mae’s HomeReady^® mortgages offer low down payment options (as low as 3%), flexible sources of down payment and more relaxed income requirements. Rocket Mortgage clients who make under 80% of the area median income can receive a lender credit of the greater of 1% of the loan amount or $2,000. If you make 50% of the area median income or loss in your purchase area, the maximum credit is $2,500 or 1% of the loan amount, whichever is greater.

Considerations: You must make under 80% of the area median income to qualify.

First-Time Home Buyer FAQs

Who is considered a first-time home buyer?

A first-time buyer is defined as an individual or household that hasn’t owned a home as a principal residence within the last 3 years.

What is the tax credit for first-time buyers?

There are no federal tax credits exclusive to first-time homeowners, but like all homeowners, they can enjoy real estate federal tax deductions. First-time home buyers can take advantage of down payment assistance programs, state tax credits and grants specifically targeting first-time home buyers to reduce the upfront cost of buying a home.

How can you be considered a first-time home buyer twice?

If you haven't owned a home in the last 3 years, you can regain first-time home buyer status, allowing you to qualify for first-time buyer benefits again, including first-time buyer grants, tax credits and down payment assistance.

What is the IRS definition of a first-time home buyer?

A first-time home buyer is an individual who hasn't owned any principal residence for 3 years from purchasing their new principal residence. If the individual is married, their spouse must also meet this criteria.

Does the IRS know when you buy a house?

By law, mortgage lenders must report significant financial transactions to the IRS. If your new home costs more than $10,000, your lenders must use Form 8300 to file the transaction with the IRS.

The Bottom Line

As you can see, “first-time home buyer” is an umbrella term that means more than you never owned a home. Being a first-time home buyer qualifies you for several benefits and advantages that can help make the buying process smoother and less expensive and put the dream of homeownership within reach.

Ready to explore your options? Start your mortgage application today.