Homeownership is still an important aspect of the American ideal. Perhaps this is why there are so many incentives in place to help first-time homebuyers purchase a house. Federal and state grants, tax credits, and other alternatives are among the available incentives. Even if you’ve already owned a house, you may be eligible for these programs if you satisfy certain criteria.
- A variety of choices make it easier for first-time homeowners (which can actually include past owners of a property).
- Both HUD-issued incentives and state programs are available to help first-time homebuyers.
- First-time homeowners may withdraw IRA money penalty-free for housing-related expenses. 1
- First-time homeowners, like all others, may benefit from tax breaks on mortgage interest and energy credits. 2
- First-time homebuyers interested in fixer-uppers may also get loans through the Federal National Mortgage Association.
First-Time Homebuyer: Definition
A first-time homebuyer is defined by the United States Department of Housing and Urban Development (HUD) as someone who satisfies any of the following criteria: 3
- An person who has not owned a primary home during the three-year period ending on the day the property was purchased (and the spouse of such an individual)
- A single parent who formerly owned a house with a prior spouse.
- A divorced housewife who has only owned with her husband
- A person who has only possessed a primary house that has not been permanently fastened to a permanent foundation in line with relevant requirements.
- A person who has only possessed a property that was not in conformity with state, municipal, or model building codes—and that cannot be brought into compliance for less than the cost of erecting a permanent structure.
Discrimination in mortgage financing is banned. There are actions you may take if you believe you have been discriminated against because of your race, religion, gender, marital status, use of public assistance, national origin, handicap, or age. Filing a report with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development is one such process (HUD).
As long as you meet the criteria for a first-time homebuyer as outlined above, the alternatives covered in this article may assist you in making your goal of purchasing a new home a reality. Do not be scared to apply if no one in your family has ever owned a house or if you have been wrongfully denied in the past.
Home in on HUD
HUD is the first place to search for grant help. Although the agency does not give grants to individuals, it does make funding available to groups having IRS tax-exempt status for first-time homeowners. Details are available on the HUD website. 4
Look to Your IRA
Every first-time homeowner is able to withdraw up to $10,000 from a conventional or Roth IRA without incurring the 10% penalty for early withdrawal. 5
The IRS defines a first-time homeowner as someone who has not bought a primary dwelling in the previous two years. 6 (Note that this differs from HUD’s definition of a first-time homeowner as someone who has not owned a personal residence in the previous three years.) 3
This implies that even if you’ve previously owned a property, if you fit the federal standards, you may use these money for a down payment, closing fees, or other relevant expenditures, according to Dean Ferraro, an agent authorized to represent taxpayers before the Internal Revenue Service (IRS).
The first-time homebuyer exception simply waives the 10% penalty. 6 Traditional IRA withdrawals will still be subject to income tax, while Roth IRA withdrawals will be exempt from extra taxes. 7
Because the $10,000 lifetime penalty-free withdrawal is per person, a couple might take a total of $20,000 (from their two IRAs) to pay for their first house. Just be careful to spend the money within 120 days or it will be subject to the 10% penalty, warns Ferraro. 6
Size up State Programs
Many states, including Illinois, Ohio, and Washington, provide down payment aid to qualified first-time homebuyers. 8910 Typically, eligibility in these programs is dependent on income, and the price of the property acquired may also be limited. Those who qualify may be able to get financial help with down payments, closing expenses, and expenditures associated with rehabbing or improving a home.
Know About Native American Options
First-time Native American homeowners may qualify for a Section 184 loan (in fact, all Native Americans can).”This is the finest federally subsidized loan available, second only to the no-money-down VA loan,” adds Ferraro. This loan has a 1.5% loan upfront guarantee charge and just a 2.25% down payment on loans above $50,000 (1.25% on loans less than $50,000). 11
Unlike a typical loan, which is generally dependent on the borrower’s credit score, the interest rate on this loan is based on the current market rate. Section 184 loans are only available for single-family houses with one to four units and principal residences. 11
Feel out the Feds
If you’re looking for a fixer-upper, the Federal National Mortgage Association’s (FNMA) HomePath ReadyBuyer program is for you. Participants who complete a mandated online homebuying education course may get up to 3% in closing cost assistance. 12 The funds will be used to purchase a foreclosed home held by Fannie Mae, also known as FNMA.
Other federal or government-sponsored organizations provide programs and services that, although not specifically for first-time buyers, benefit people with less money for down payments or a restricted credit history. The most well-known are Federal Housing Administration (FHA) loans and Department of Veterans Affairs loans (VA loans).
Tax Benefits for All Homebuyers
Purchasing your first house also qualifies you for the tax incentives available to all homebuyers, whether it’s their first or fifth dwelling.
Home Mortgage Interest Deduction
Mortgage interest used to be one of the most significant deductions for people who itemize. The Tax Cuts and Jobs Act (TCJA) has, however, restricted this deduction to interest paid on $750,000 or less ($375,000 or less for married couples filing separately). 13
However, as a result of the Consolidated Appropriations Act, the standard deduction in 2022 for a single or married couple is $12,950 and $25,900, respectively, making it less likely that individuals will have enough deductions to itemize. 14
Mortgage interest is still deductible. Interest paid to your lender should be reported on a 1098 form handed out yearly in January or early February.
Points or Loan Origination Fees Deduction
According to Lisa Greene-Lewis, a certified public accountant, the costs and points you pay to get a house mortgage may be deducted. “Points will also be reported on Form 1098 from your lender or your settlement statement at the end of the year,” she adds, noting that the regulations for deducting points varies depending on whether the transaction is a first buy or a refinance.
Property Tax Deduction
Property tax deductions for state and municipal property taxes are available dependent on the value of your house. The amount subtracted is the amount paid by the property owner, including any escrow payments received at settlement or closing. The TCJA, however, has capped the deduction at $10,000. 15
“If you pay your property taxes via your mortgage company, you may discover property taxes paid on your 1098 form,” Greene-Lewis explains. “Otherwise, state the amount of property taxes paid for the fiscal year listed on your property tax bill.”
Residential Energy Credit
Installers of solar panels, geothermal heat systems, and wind turbines may be eligible for a tax credit of up to 26% of the cost. The credit is also available for energy-efficient windows and heating and cooling systems. To learn whether you qualify, see the IRS’s list of energy incentives.
Greene-Lewis emphasizes the distinction between a tax deduction and a tax credit. “A tax deduction lowers your taxable income, but your real tax savings are determined by your tax bracket. A tax credit is a dollar-for-dollar decrease in the amount of taxes owed.”
That implies credit saves you much more. “A $100 tax credit would decrease your tax obligation by $100, whereas a $100 tax deduction would reduce your taxes by $25 if you are in the 25% tax bracket,” Greene-Lewis explains.
Frequently Asked Questions
Do I Get a Tax Break for Buying a House?
The mortgage interest deduction ceiling of up to $750,000 is the most advantageous tax relief for homeowners. In 2022, the standard deduction for individuals is $12,900, and for married couples filing jointly, it is $14,900. 14 Other tax benefits are available based on the circumstances of the house being purchased and the person.
What Are the First-Time Homebuyer Programs?
FHA loans, USDA loans, VA loans, Fannie Mae or Freddie Mac programs, the Native American Direct Loan, and Energy-Efficient Mortgages are among the most popular first-time homebuyer programs.
What Is the First-Time Homebuyer Act?
The First-Time Homebuyer Act, proposed by President Joe Biden, would decrease an individual’s tax payment by $15,000 for singles and $7,500 for married couples filing separately. The measure is still awaiting approval before it can become law. 17
The Bottom Line
The expenses of home ownership extend beyond down payments and monthly mortgage payments. Before you start looking for a property, evaluate how much you can realistically afford—not only for a house, but also for a mortgage lender.
“Make sure you account for closing costs, moving costs, the home inspection, escrow fees, home insurance, property taxes, repair and maintenance costs, possible homeowner’s association fees, and more,” says J.D. Crowe, president of Southeast Mortgage and former president of the Mortgage Bankers Association of Georgia.
Knowing you can afford the house you want offers you the greatest chance of staying in it for many years.
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