Buying a home in today’s market can be a frustrating task for anyone. With low inventory, high mortgage rates, and fierce competition, first-time homebuyers may feel all but pushed out. The First-Time Homebuyer Act of 2021 could prove to be a useful tool by providing some homebuyers with a $15,000 incentive.
What is the First-Time Homebuyer Tax Act of 2021?
What Are the Benefits of the Biden Homebuyer Credit?
Qualifications for the First-Time Homebuyer Act
Before getting into what this Act covers, who is eligible, and how you can get it, it’s important to note that as of right now, the Biden Homebuyer Credit is still a proposed bill. That means that final approval has not been granted, it isn’t currently in place, and there’s no guarantee that it will pass.
However, things do look good that the tax credit will go through, but details could change when it does. For now, the proposed actions will need the approval of Congress, and this article will discuss the current expectations of the impact once it does.
The bill is a proposed tax credit of $15,000, meaning that if you buy your first home, $15K will be eliminated from your tax liability. If your federal tax obligation is $6,000, the First-Time Homebuyer Tax Act of 2021 would eliminate the debt and provide a refund of $9,000. The bill is intended to help those in the lower-to-middle-income brackets.
While the initial proposal was that the Act would be a tax advance and available at the time of closing on a new home, it’s rolling out as a credit. Meaning that financial obligations must be provided upfront by the homebuyer and will be reimbursed after taxes are filed.
The total proposed credit will not exceed 10% of the home’s purchase value up to $15,000. For those who are married and filing separately, the credit is reduced by half. There are other stipulations, of course, which we’ll also cover.
A major hurdle in purchasing a new home has traditionally been coming up with a 20% down payment. According to the United States Census Bureau, the average household income in 2019 was $64,324. Even a home purchased at $110,000 would require savings of $22K, which is a significant amount for the average American.
Suppose, however, you were able to save that amount of money to put down on a home. It may be harder to let go when it comes time to empty your savings. Knowing that you have up to $15,000 coming back may make it a little easier.
Furthermore, several types of mortgage loans require no down payment, making the tax credit a sole incentive to purchase a new home. These types of zero-down payment loans include the following:
The First-Time Homebuyer Act of 2021 is a beneficial financial resource for new property owners who feel pushed out of the current market. The incentive could make it easier to achieve homeownership. The downfall may be that the competition in the market has turned up higher.
The Act does have qualifications as it is intended to provide a break to lower or middle socioeconomic prospective buyers. Still, the contingencies are pretty lenient, and a significant number of everyday people will be able to take advantage as long as the following stipulations are met:
● First-Time Homebuyer: You must be purchasing a home for the first time and not have been a prior homeowner within the last 36 months before closing.
● Age Requirement: In order to qualify, you must be at least 18 years old or the spouse of someone who is. This requirement prevents adults from purchasing homes in a minor’s name to reap the benefits of the tax incentive.
● Primary Residence: If you’re purchasing a rental or vacation property, the Act will not benefit you. You can also not purchase a property from a relative and qualify for the incentive. The home you purchase must be your primary place of residence.
● Income Limitations: Unlike previous home-buying tax credits, this one is based on an area income limit. In order to use this credit, your income must not exceed 120% of your area’s median income. The home being purchased must be at or below 110% of the area’s median purchase price.
The income limit could see some changes as it goes through the approval process. The advantage of the area percentage is that it makes the tax credit relevant for all homebuyers. Particularly for those who live in places with a higher cost of living.
If you live in an area like New York, where the median price of a home is $386,000, the First-Time Homebuyer Act of 2021 could keep you competitive with purchasing ability up to $424,600. The downside is regardless of the purchase amount, the credit caps out at $15K.
As with most things in life, every situation has pros and cons. While the First-Time Homebuyer Act 2021 would allow most American households to receive the break, it does have some drawbacks. There are repercussions if you buy a home, receive the credit, and then move.
As it stands now, if you purchase the property and move within five years of closing, you’ll have to pay back all or portions of the credit. There are many reasons why someone moves, including area cost of living, available job opportunities, or the need for space.
Still, some provisions are in circulation, including exemptions for repayment under conditions of divorce, death, and certain military-related transfers. If you do use the credit while not qualifying for exemption, you can expect to pay back the following amounts:
● Moving in the first year is a 100% payback amount.
● Moving in the second year requires repayment of $11,250
● Moving in the third year equals repayment of $7,500
● Moving in the fourth year will cost $3,750 in repayment
After the fifth year of residence in the purchased home, there is no longer a requirement to pay back the tax credit. So while you might not have to repay the full amount, you might want to consider seeking the advantage if you’re unsure about future plans.
Another concern regarding the incentive for additional homebuyers to enter the market is competition. While President Biden campaigned to make homes more affordable for all, this Act can help achieve those efforts. It may make the market even more competitive if more people are trying to buy a home in an already low inventory situation.
In a remarkably competitive and high-value housing market, the dream of buying a new home can become a nightmare for some prospective buyers. The Biden First-Time Homebuyer Act of 2021 can help turn those visions around.
With tax incentives up to $15,000, many Americans could actually have a new opportunity to enter the buying market. Still, the bill needs approval, and personal circumstances must be considered before you start your search. However, this tax incentive could make buying a new home an affordable option for those who may not have had the opportunity previously.
