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First-time homebuyer tax credit: Everything you need to know

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Westend61/Getty Images/Westend61

If you're a first-time homebuyer, searching for your dream home might seem overwhelming. There are many new concepts to learn about, like interest rates, down payments, private mortgage insurance, closing costs, homeowners insurance and more. Especially when it's during a national housing shortage, it might feel like many homes are unaffordable.

Accordingly, the federal government is trying to provide some relief to new homeowners, with a first-time homebuyer tax credit. The Biden administration and Congress have proposed new legislation called the First-Time Homebuyer Act of 2021. As of July 2021, this bill had not yet passed the House and Senate, but it would provide a first-time homebuyer tax credit of up to $15,000 to help people afford their first home.

Here's a closer look at what the first-time homebuyer tax credit might be able to do for you and what other help is available.*

What is the first-time homebuyer tax credit?

The First-Time Homebuyer Act of 2021 was proposed in April 2021. If it passes and is signed into law, it would create a new federal tax credit of up to $15,000 for the purchase of a first home. Single people who buy their first home could receive a tax credit of up to $15,000, and married people filing separately could receive up to $7,500 each.

The goal is to help first-time home buyers afford a house by reducing their federal income taxes. A federal tax credit is a dollar-for-dollar reduction in the income taxes that you owe the government. For example, if you owe $10,000 in federal income taxes and you receive a $3,000 tax credit, it would bring your tax bill down to $7,000.

When can a first-time buyer take advantage of the credit?

This tax credit isn't yet available. The bill is awaiting a vote in the House of Representatives on its way through Congress. It's not certain whether it will pass or when the tax credit might become available. If it does pass Congress, President Joe Biden is expected to sign it into law.

What would the qualifications be to receive the credit?

It's unlikely that this will be "easy money" that anyone could get automatically. The bill as it stands lists some requirements for how to qualify for the first-time homebuyer tax credit:

  • Purchase history. The fine print of the bill provides that you can't have owned or purchased a home in the previous three years.
  • Value of the home. The tax credit would be for up to 10% of the purchase price of the home for a maximum credit of $15,000. Also, the home you purchase would have to be at or below 110% of your area's median purchase price.
  • Income limitations. Your income would have to be at or below 160% of your area's median income.
  • Planned use. You wouldn't be able to use this tax credit to buy a rental house or investment property; you have to live in the home and use it as your primary residence.
  • Relation to seller. You won't be able to use the credit when buying a house from someone you're related to.
  • Time limitations. To keep the full tax credit, you would need to stay in the home for at least four years.

What are some other tax credits and programs for first-time homebuyers?

Even if the new tax credit never becomes law, other federal and state-based programs offer financial assistance for all homebuyers, not just first-timers:

VA loans, FHA loans and USDA loans

If you're an active-duty military servicemember, military veteran or surviving spouse, you might qualify for a home mortgage loan backed by the U.S. Department of Veterans Affairs, also known as a VA home loan. VA loans require no down payment, no private mortgage insurance, have limited closing costs and tend to have easier credit requirements than traditional bank loans.

FHA loans are backed by the Federal Housing Administration, and they offer low down payments (as low as 3.5% of the purchase price of the home), low closing costs and easier credit qualifying compared to a conventional mortgage. FHA loans might give you a better deal on getting into a house without having to tie up so much cash in a down payment.

Another option if you're considering rural or small-town living is a USDA Rural Development home loan. With these, the U.S. Department of Agriculture aims to help qualifying homebuyers get low-interest home loans with low (or zero) down payments while encouraging people to live in places that have lost population in recent years. You must have a moderate to low income to qualify, and the home that you want to purchase must be located in an "eligible rural area" as designated by the USDA.

State-level mortgage programs

Depending on where you live, state government programs may be able to make homeownership more affordable for you. Start by checking the U.S. Department of Housing and Urban Development's website and selecting your state and navigating to the "Local Resources" section.

Here are just some of the benefits that states offer to homebuyers:

  • The California Housing Finance Agency has a MyHome Assistance Program that provides a deferred payment loan of up to 3.5% of a home's purchase price to help homebuyers with down payment or closing costs.
  • The State of New York Mortgage Agency runs two mortgage programs that help people with low down payments (as low as 3% of the purchase price) and down payment assistance.
  • The Texas Department of Housing and Community Affairs operates the My First Texas Home program, which provides eligible veterans and first-time homebuyers with a 30-year low-interest rate mortgage. The program also offers down payment and closing cost assistance for up to 5% of the mortgage amount.

Are there more tax advantages to homeownership?

Keep in mind that even if the First-Time Homebuyer Act of 2021 never becomes law, a few other tax benefits are already on the books that might make homeownership more affordable after your purchase.

For instance, homeowners can deduct state and local property taxes (up to $10,000 per year per household) from their taxable income for federal income tax purposes. They also can deduct home mortgage interest. Depending on how much you're paying in property taxes and mortgage interest as part of your monthly house payment, you might be able to save money at tax time. But it's important to note that many middle-income homeowners might not be able to deduct enough mortgage interest and property taxes to exceed the standard deduction.

Homeownership can provide many wonderful benefits, such as the potential to build equity and make a profit on the future sale of your home, the reassurance of having a place that is truly your own and the emotional rewards of owning a comfortable place to raise your family. But being a homeowner does not always come with tax breaks. Make sure you can comfortably afford your mortgage payment even if you don't get to itemize your deductions at tax time.

Ask your mortgage lender what programs they might offer as well. Banks and credit unions often can save first-time homebuyers on down payments and other costs. For example, Thrivent Credit Union offers some borrowers the option to help pay their private mortgage insurance.

Ready to learn more about your options for an affordable mortgage as a first-time homebuyer? Speak with a financial advisor near you to see how buying a home fits with your personalized financial strategy.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Deposit and lending services are offered by Thrivent Credit Union, the marketing name for Thrivent Federal Credit Union, a member-owned not-for-profit financial cooperative that is federally insured by the National Credit Union Administration and doing business in accordance with the Federal Fair Lending Laws. Insurance, securities, investment advisory and trust and investment management accounts and services offered by Thrivent, the marketing name for Thrivent Financial for Lutherans, or its affiliates are not deposits or obligations of Thrivent Federal Credit Union, are not guaranteed by Thrivent Federal Credit Union or any bank, are not insured by the NCUA, FDIC or any other federal government agency, and involve investment risk, including possible loss of the principal amount invested. Must qualify for membership in TCU. TCU is an Equal Housing Lender. TCU’s NMLS ID 1012971